2016 (5) TMI 106 - AT - Income Tax

Disallowance of commission payment - Held that - The impugned disallowance merits deletion as these payments have been made by the assessee on behalf of its clients and, hence, the same does not constitute its own expenditure. Even though the assessee has routed the expenditure and reimbursement received from its clients through the profit and loss account, yet it is settled principle that the books of account of the assessee cannot be the sole determinative factor to decide about the nature of expenditure.According to the assessee, the commission payments have been made to the workers as an incentive to get the work done quickly. Even though the Assessing Officer has invoked the provisions of the Explanation to section 37(1), he has not cited the relevant law, which prohibits such kind of payments. According to the learned authorised representative, it is a prevailing trade practice and such payments are not prohibited by any law. The assessee s claim that it was paid to the workers have not been disproved. Even otherwise, we have noticed earlier that the same represents payments made on behalf of its clients and, hence, the disallowance of the same is not called for in the hands of the assessee. - Decided in favour of assessee

Summary

Issues involved:
Challenge to order of Commissioner of Income-tax (Appeals) disallowing commission payment of ?34,60,000 for assessment year 2009-10.

Detailed Analysis:
The assessee, a partnership firm engaged in clearing and forwarding agency business, appealed against the order of the Commissioner of Income-tax (Appeals) disallowing a commission payment of ?34,60,000 for the assessment year 2009-10. The authorized representative did not press ground No. 2 related to the disallowance of ?1,67,633. The main issue revolved around the disallowance of the commission payment (?34,60,000) claimed by the assessee.

The Assessing Officer disallowed the commission payment, considering it as bribes and not allowable as a deduction under section 37(1) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) upheld this disallowance. The authorized representative contended that the expenses were incurred on behalf of clients and not the assessee's own expenses. He argued that the payments were made to dock workers as speed money to expedite loading and unloading tasks, a common industry practice. The representative provided bills raised on clients to support the assertion that the expenses were on behalf of clients.

The Departmental representative supported the tax authorities' decision to disallow the commission payment. However, the Tribunal found in favor of the assessee. The Tribunal reasoned that the payments were made on behalf of clients and did not constitute the assessee's own expenditure. It highlighted that the nature of expenditure cannot solely be determined based on the profit and loss account entries. The Tribunal noted that the Assessing Officer did not establish any law prohibiting such payments and that incentivizing dock workers was a common industry practice. The Tribunal emphasized that the payments were not disproved to be made to workers and were on behalf of clients, thus not warranting disallowance.

Conclusively, the Tribunal set aside the Commissioner of Income-tax (Appeals) order and directed the Assessing Officer to delete the disallowance of the commission payment. The appeal by the assessee was partly allowed, with the judgment pronounced on 18th March 2016.