2017 (1) TMI 1783 - AT - Income Tax

Disallowance of commission expenses - payment of commission for obtaining supply order from government agencies - Assessee was asked by AO to establish the genuineness as well as reasonableness of expenditure in question and assessee was further required to explain the services rendered against which the commission has been claimed as expenditure which he failed to do - CIT(A) allowed the claim of commission payment - HELD THAT - The assessee has shown the commission ranging from 7% to 9% above the commission to MPLUN. The expenditure is supported by the bills raised by the payee. The assessee has given PAN mentioning the bill. The commission has been paid for collecting the requirement from the Government offices located at Indore Khargone Mandla Balaghat Chhindwara and Dewas. The assessee is engaged in manufacture of sub-mersible pumps and during the year the assessee has supplied the product of the assessee to Public Health Engineering Department Govt. of M.P. and many other Government departments. Therefore the assessee has to identify various places thereafter for getting the orders the assessee has to make installation of submersible pumps at the various sites identified by Public Health Department and liasoning charges have been paid by the commission account. Thus the assessee has made payment for the services rendered. The assessee has explained the nature of services rendered. Therefore we are of the view that the learned CIT(A) is justified in allowing the claim. The same kind of commission was allowed in four earlier assessment years 2005-06 to 2008-09 and it was allowed in scrutiny assessments for the assessment years 2005-06 and 2006-07. Therefore rule of consistency is followed by the learned CIT(A). We are of the view that the learned CIT(A) is justified. Moreover the assessee has given sufficient evidence to prove the same. Therefore we do not find any discrepancy in the order of the learned CIT(A) - Case followed PURE PHARMA PVT. LTD. 2004 (3) TMI 31 - MADHYA PRADESH HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of commission expenses disallowed by the Assessing Officer.
2. Role and necessity of commission agents in government contracts.
3. Consistency in allowing commission expenses in previous assessment years.
4. Adequacy of evidence provided for commission expenses.
5. Legal precedents supporting the allowance of commission expenses.

Detailed Analysis:

1. Justification of Commission Expenses Disallowed by the Assessing Officer:
The primary issue revolves around whether the learned CIT(A) was justified in allowing the commission expenses that the Assessing Officer had disallowed. The Assessing Officer questioned the genuineness and reasonableness of the commission expenses claimed by the assessee, particularly noting that the presence of middlemen in government transactions is generally not welcomed. The Assessing Officer concluded that no government officer would permit middlemen, thus disallowing the commission claimed.

2. Role and Necessity of Commission Agents in Government Contracts:
The learned CIT(A) provided a detailed explanation of the role of commission agents in the business of supplying and installing submersible pumps for government departments. The CIT(A) highlighted that commission agents are essential for gathering requirements, pursuing government agencies for indents, and ensuring compliance with tender processes. The CIT(A) clarified that while Madhya Pradesh Laghu Udyog Nigam Ltd. (MPLUN) handles the tendering process, commission agents are involved in pre-tender and post-tender activities, which do not overlap with MPLUN’s responsibilities. This explanation countered the Assessing Officer’s view that commission agents have no role in government contracts.

3. Consistency in Allowing Commission Expenses in Previous Assessment Years:
The CIT(A) emphasized the importance of consistency, noting that the assessee had claimed similar commission expenses in at least four previous assessment years (2005-06 to 2008-09) and that these expenses were allowed, even during scrutiny assessments in some years. The CIT(A) cited the case of Mandeep Singh (2010) 328 ITR 169 (P&H) to support the rule of consistency, thereby justifying the allowance of commission expenses for the assessment year 2009-10.

4. Adequacy of Evidence Provided for Commission Expenses:
The CIT(A) noted that the assessee had provided detailed evidence, including services rendered by commission agents, ledger accounts, bills, and cheque payments. The CIT(A) observed that the onus shifted to the Assessing Officer to disprove these facts, which the Assessing Officer failed to do. The CIT(A) also mentioned that the commission agents had reflected the commission receipts in their returns of income, further substantiating the genuineness of the expenses.

5. Legal Precedents Supporting the Allowance of Commission Expenses:
The CIT(A) referenced several legal precedents where courts had consistently held that commission payments in government contracts are allowable expenses, provided they are not for illegal gratification. The CIT(A) cited cases such as Bharat Medical Stores (2009) 308 ITR 373 (P&H) and Laxmi Engineering Industries (2008) 298 ITR 203 (Raj.) to support this view. Additionally, the Tribunal supported the CIT(A)’s decision by referencing the jurisdictional High Court’s decision in CIT vs. Pure Pharma, (2005) 144 Taxman 364 (MP), which upheld the allowance of commission expenses as business expenditures.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to allow the commission expenses, emphasizing the necessity and role of commission agents in government contracts, the consistency of such allowances in previous years, the adequacy of evidence provided by the assessee, and supporting legal precedents. The appeal of the Revenue was dismissed, and the CO filed by the assessee was also dismissed.