2015 (12) TMI 1828 - AT - Income Tax

Allowability of commission payment - non-discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business - HELD THAT - Undisputedly, the assessee company had paid commission through account payee cheque. This will not debar the AO from probing the matter further to examine whether the commission payments are allowable expenditure or not. In this context, it is worth quoting that the decision of the Hon ble Supreme Court in the case of Laxmi Narayan Madanlal Vs CIT 1972 (9) TMI 4 - SUPREME COURT . AO is empowered to probe further and reach at a conclusion whether the commission was paid for the services actually rendered and determine whether the expenditure was laid out wholly and exclusively for the purpose of business. In the present case, the AO had called upon the assessee company to furnish evidence in support of the services rendered by the commission agents. In response to this, except highlighting the role of commission agent, no evidence was furnished in support of the services rendered by the commission agent. The AO gave categorical finding that the assessee had failed to substantiate the actual services rendered by the sales agent. Assessee company had chosen not to file any evidence in support of the services rendered by sales agencies either before the learned CIT(A)or before us. Even before us, the learned AR miserably failed to demonstrate before us as to what kind of proof was filed before the lower authorities in support of services rendered by the commission agent. Pursuant to the direction of the Bench to file evidence in support of the services rendered the assessee had chosen to file only correspondence relating to the payment which no way establishes the actual services rendered by the commission agent. Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. CIT(A) had not examined any evidence to show that the agents have actually rendered their services. The learned CIT(A) had totally misdirected himself by examining the issue from the angle of tax deducted at source and he had failed to examine whether the services are actually rendered by the commission agents or not. Therefore, we are unable to sustain the order of the learned CIT(A) and hold that the commission payments in question are not allowable. The assessee company had miserably failed to demonstrate the actual services rendered by the agents to whom the commission payments were made, despite ample opportunity granted by this Tribunal to furnish evidence in support of service rendered by commission agent. - Decided against assessee.

Summary

Issues Involved:
1. Allowability of commission payments as business expenditure under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:

Allowability of Commission Payments:
The primary issue in this case revolves around the allowability of commission payments amounting to Rs. 2,93,08,446/- as business expenditure under Section 37 of the Income Tax Act, 1961. The assessee, a company engaged in the manufacture and sale of Hydro Turbines, claimed these payments as deductions. The Assessing Officer (AO) disallowed these payments on the grounds that the assessee failed to substantiate the actual services rendered by the agents.

Revenue's Grounds of Appeal:
The revenue raised several grounds, arguing that the CIT(A) erred in holding the commission payments as genuine and reasonable without appreciating that the payments were made for general liasoning and coordination activities. The revenue contended that the assessee failed to prove the actual work carried out by the agents and that merely filing agreements does not amount to actual rendering of service.

Assessee's Argument:
The assessee argued that they had provided full details of the payments, including copies of agreements describing the nature of services rendered. They also highlighted that the payments were made through banking channels, asserting that these should be considered valid business expenditures.

Tribunal's Observations:
The Tribunal examined the material on record and noted that the mere existence of agreements and payment through account payee cheques does not automatically validate the commission payments as business expenditures. Citing the Supreme Court's decision in Laxmi Narayan Madanlal Vs CIT, it was emphasized that the Income Tax Officer (ITO) is not bound to accept the payments as deductible without probing further into the actual services rendered.

The Tribunal observed that the AO had called upon the assessee to furnish evidence of the services rendered by the agents. However, the assessee failed to provide substantial proof beyond general correspondences related to payments. The AO's findings highlighted inconsistencies in the commission rates and the lack of technical expertise of the agents, further questioning the legitimacy of the claimed expenditures.

Legal Precedents:
The Tribunal referred to several legal precedents, including:
- CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd: It was held that the burden of proving that an expenditure was incurred wholly and exclusively for business purposes lies on the assessee.
- Kanu Kitchen Kulture (P) Ltd Vs DCIT: The Delhi Tribunal disallowed commission payments where the assessee failed to demonstrate the nature and extent of services rendered by the agents.
- Schneider Electric (Ind.) Ltd Vs CIT: The Delhi High Court held that in the absence of material evidence suggesting that commission agents procured sale orders, no commission should be allowed.

Conclusion:
The Tribunal concluded that the assessee failed to discharge the burden of proving that the commission payments were incurred wholly and exclusively for business purposes. The CIT(A) had not examined any evidence to show that the agents actually rendered their services and had misdirected the issue by focusing on tax deducted at source (TDS) compliance rather than the actual rendering of services.

Therefore, the Tribunal allowed the revenue's appeals for the assessment years 2009-10 and 2010-11, disallowing the commission payments as business expenditures. The appeal filed by the assessee was dismissed.

Order Pronounced:
The order was pronounced in the open court on 30th December, 2015, concluding that the commission payments in question are not allowable as business expenditures under Section 37 of the Income Tax Act, 1961.