2018 (5) TMI 2092 - AT - Income Tax

Disallowance of commission expenses paid - HELD THAT - CIT(A) considering the submissions of the assessee deleted the disallowance observing that the recipient company is a loss making company and is not a ground for disallowance of commission. He also accepted the submissions of the assessee that M/s. Toshbro Controls Pvt. Ltd. is known to customers by its flag ship company and may not be aware of the subsidiary company and therefore the customer might have stated that they have got materials directly from the assessee company M/s. Nova Controls Pvt. Ltd. which is the flag ship company. As find from the details that similar commission has been paid to M/s. Toshbro Controls Pvt. Ltd. during the Financial Years 2007-08 to 2014-15 and the percentage of total sales made through the M/s. Toshbro Controls Pvt. Ltd. by the assessee ranges from 58.30% to 78.78% and the commission paid ranges between 11.57% and 18.83% depending upon the percentage of sales to total sales. We find that that the Revenue has accepted the payment of commission in all the earlier years and disallowance was made only during this year and based on an apprehension that the sister concern is making loss and therefore assessee tried to shift the profits this fact is not proved beyond doubt. When the commission paid by the assessee is accepted in all earlier years there is no reason why it should not be accepted during the Assessment Year under appeal - we do not find any infirmity in the order passed by the Ld.CIT(A) in allowing the claim of the assessee. Hence the order of the Ld.CIT(A) is sustained on this issue. Disallowance of travelling expenses to 12.5% as against 25% disallowed by AO - HELD THAT - As we are of the view that the matter be restored to the file of the Assessing Officer to substantiate the claim of travelling expenses by the assessee with evidences. Hence this issue is restored to the file of the Assessing Officer for fresh adjudication. This ground is allowed for statistical purpose.

Summary

Issues:
1. Disallowance of commission expenses paid to M/s. Toshbro Controls Pvt. Ltd.
2. Disallowance of travelling expenses at 25% and subsequent reduction to 12.5%.

Issue 1: Disallowance of Commission Expenses:
The case involved an appeal by the assessee and the Revenue against the order of the Ld. Commissioner of Income-tax (Appeals). The primary issue was the deletion of disallowance of commission expenses paid to M/s. Toshbro Controls Pvt. Ltd. The Assessing Officer disallowed a significant amount of commission expenses incurred by the assessee, suspecting the genuineness of the services rendered by M/s. Toshbro Controls Pvt. Ltd. The Revenue contended that the commission was not allowable as a deduction due to doubts regarding the benefit derived by the assessee. However, the Ld.CIT(A) deleted the disallowance, emphasizing that the recipient company being a loss-making entity was not a valid ground for disallowance. The Ld.CIT(A) also considered that customers might not be aware of the subsidiary company, leading to potential misunderstandings in transactions. The Tribunal upheld the Ld.CIT(A)'s decision, noting that similar commissions had been paid in previous years without issue, and there was no concrete evidence to support the Revenue's apprehensions of profit-shifting.

Issue 2: Disallowance of Travelling Expenses:
The second issue pertained to the disallowance of travelling expenses at 25% by the Assessing Officer, which was subsequently reduced to 12.5% by the Ld.CIT(A). The assessee and the Revenue both raised concerns regarding this disallowance. The Learned Counsel for the assessee argued that the Assessing Officer did not provide a proper opportunity to substantiate the claim with relevant details during the assessment proceedings. Consequently, the Tribunal decided to restore the matter to the Assessing Officer for a fresh examination of the travelling expenses claim with proper evidences. Both parties agreed to this course of action, leading to the issue being allowed for statistical purposes.

In conclusion, the Tribunal partially allowed both appeals for statistical purposes, sustaining the decision on the disallowance of commission expenses while remanding the issue of travelling expenses back to the Assessing Officer for further examination.