2016 (5) TMI 1490 - AT - Income Tax

Disallowance of commission expenses paid against sale of plot - bonafides of the commission payment - credibility of expenditure - exorbitant amount commission - absence of proof of service provided in sale of land - HELD THAT - There is no corroboration for involvement of the middlemen in the deal except the MOU which is found to be illusory and lacks in material features. The buyer has also not vouched the deal. Payment of such astounding sum to a person having as little understanding of the subject as possible neither accords with any business practice nor is corroborated by any direct or circumstantial evidences. It only militates against any logic. Which are those other parties who were contacted or what other efforts were carried out prior to and in the course of deal are not borne out from records. It is difficult to believe the credibility of expenditure stated to be incurred by the Assessee on the face of such sordid facts. Thus, viewed from any perspective, the propriety of payment of staggering amount of ₹ 90 lacs purportedly made against obtaining services for sale of property based on some symbolic MOU deserves to discredited. The genuineness of the expenditure incurred is not at all proved. The initial examination of Shri B.S. Agarwal clearly shows that Shri B.S. Agarwal did not play any role in the land deal. Thus, payment of exorbitant amount of ₹ 90,00,000/- towards commission on some mundane MOU without exhibition of services is an utter improbability and does not stand to any reason. The assessee has not discharged initial burden of proof which squarely lies upon him to reasonably establish receipt of services. The receipt by payee can be for variety of reasons both gratuitous and non-gratuitous. The payment of taxes paid by the recipient though a mitigating factor, by itself will not render the corresponding expenses as sacrosanct. The assessee is under obligation to discharge the burden to reasonably prove the bonafides of expenses claimed. The Hon ble Supreme Court in the case of CIT v. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT has held that the taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of commission expenses of ?90,00,000/- paid to Shri B.S. Agarwal.
2. Verification of the bonafides of the commission payment.
3. Examination of the Memorandum of Understanding (MOU) and its validity.
4. Role and credibility of the commission recipient in the transaction.
5. Applicability of section 40A(2) of the Income-tax Act, 1961.
6. Revenue neutrality and tax avoidance considerations.

Detailed Analysis:

1. Disallowance of Commission Expenses:
The assessee challenged the CIT(A)'s order disallowing ?90,00,000/- paid as commission to Shri B.S. Agarwal for the sale of a plot. The Assessing Officer (AO) observed that Shri Agarwal was not engaged in brokerage or commission business and had no prior or subsequent income from such transactions. The AO concluded that the commission payment was not genuine and added the amount to the assessee's total income.

2. Verification of Bonafides of Commission Payment:
The AO examined Shri Agarwal under section 131(1) of the Act and found that he did not know the buyer and could not provide relevant details about the transaction. The AO noted that Shri Agarwal's justification for the commission—settling bills and taxes—lacked corroborative details. The AO also highlighted that the plot purchaser denied any involvement of a commission agent, leading to the conclusion that Shri Agarwal played no role in the deal.

3. Examination of the Memorandum of Understanding (MOU) and Its Validity:
The assessee relied on an MOU dated 17.04.2008, which stated that Shri Agarwal would sell the plot within six months or buy it himself. The MOU outlined various responsibilities for Shri Agarwal, including clearing encroachments and restoring utilities. However, the Tribunal found that the MOU lacked basic commercial traits, such as securing earnest money or legal recourse for non-performance. The MOU was deemed a self-serving document with no legal efficacy, indicating extraneous considerations.

4. Role and Credibility of the Commission Recipient:
Shri Agarwal's statements revealed that he had no expertise in land deals and had not earned income from such transactions before or after the assessment year. He admitted to not knowing the buyer and claimed that his employee handled negotiations. His lack of involvement and knowledge about the transaction led the Tribunal to conclude that he did not render any services warranting the commission. The Tribunal found his subsequent statements, which contradicted his initial testimony, to be tutored and lacking credibility.

5. Applicability of Section 40A(2):
The assessee argued that section 40A(2) was not applicable as Shri Agarwal was not related to the assessee. However, the Tribunal focused on the bonafides of the commission payment rather than the applicability of section 40A(2). The Tribunal emphasized that the assessee failed to prove the genuineness of the expenditure and the actual receipt of services.

6. Revenue Neutrality and Tax Avoidance Considerations:
The assessee cited the Supreme Court's decision in CIT v. Glaxo Smithkline Asia (P.) Ltd., arguing that the transaction was revenue neutral as taxes were paid by the recipient at the maximum marginal rate. The Tribunal rejected this argument, noting that the issue was the bonafides of the expenditure, not the correctness of the value. The Tribunal held that the assessee did not discharge the burden of proving the genuineness of the commission payment, and the payment of taxes by the recipient did not render the expenditure sacrosanct.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to disallow the commission expenses of ?90,00,000/-. The Tribunal found that the MOU was illusory, the commission recipient did not render any services, and the assessee failed to prove the genuineness of the expenditure. The appeal of the assessee was dismissed.

Order Pronouncement:
The order was pronounced on 25th May 2016.