2016 (8) TMI 691 - AT - Income Tax

Disallowance of commission paid to agents - Held that - The assessee had used the services of 15 agents and only 3 have declined to have made any services to the assessee. In the given case, there are certain issues such as there exist only oral agreements, the agents are from different field of activities and the customers are denying the presence of agents in the transaction. At the same time, the Revenue had investigated this issue independently without involving the assessee but it has carried out the investigation partially. There are some holes in this investigation. The first being the statements recorded from the 3 lady agents are stereo typed and the languages of all three are exactly similar. The Revenue has not brought out whether the agents who denied, has done any service to the assessee had filed their return of income, if filed, whether they have declared the commission as their income and taken the tax credit. In the absence of such details the case is peculiar and the assessee had submitted the details of the agents, who had agreed that they had provided services, the assessee must be given the advantage, even though there is no written agreement. Accordingly, we allow the commission to the extent of those agents who had confirmed before the Assessing Officer to have provided the service to the assessee and at the same time, we cannot overlook the point of view of the Department that the agents have declined to have any business connection with the assessee. Accordingly, we direct the Assessing Officer to allow the commission to the extent of 12 agents and uphold the disallowance of commission to the extent of 3 agents, who denied to have done any services to the assessee. - Decided partly in favour of assessee.

Issues Involved:
1. Disallowance of commission payments claimed by the assessee.
2. Onus of proving the genuineness of the commission payments.
3. Examination of the recipients of the commission by the Assessing Officer.
4. Confirmation of disallowance by the Commissioner of Income-tax (Appeals).
5. Assessment of the relevance of expenses to the revenue generated.
6. Partial acceptance of commission payments by the Tribunal.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Payments Claimed by the Assessee:
The assessee, an individual trading in industrial chemicals, claimed a commission payment of ?48,13,253 for the assessment year 2011-12. The Assessing Officer disallowed this amount, concluding it was not incurred for business purposes after examining the recipients and finding discrepancies in their statements. The Commissioner of Income-tax (Appeals) upheld this disallowance, stating that the assessee failed to prove the expenditure was wholly and exclusively for business purposes despite payments being made by cheque and TDS being deducted.

2. Onus of Proving the Genuineness of the Commission Payments:
The assessee contended that the commission payments were genuine, made by cheque, and TDS was deducted. However, the Commissioner of Income-tax (Appeals) emphasized that payment by cheque and TDS deduction alone do not suffice to prove the genuineness of the expenditure under section 37(1) of the Income-tax Act. The assessee was required to demonstrate the business purpose of the payments, which was not adequately done.

3. Examination of the Recipients of the Commission by the Assessing Officer:
During the assessment proceedings, the Assessing Officer issued summons to the recipients and recorded their statements. Out of 15 agents, 3 denied any business connection with the assessee, raising doubts about the legitimacy of the commission payments. The assessee argued that these individuals became hostile due to personal differences and that the Assessing Officer should not have solely relied on their statements to deny the deduction.

4. Confirmation of Disallowance by the Commissioner of Income-tax (Appeals):
The Commissioner of Income-tax (Appeals) confirmed the disallowance, stating that the Assessing Officer conducted a thorough enquiry and the assessee failed to discharge the onus of proving the expenditure was for business purposes. The Commissioner observed that the assessee's claim regarding services rendered by the parties who received the commission was disproved.

5. Assessment of the Relevance of Expenses to the Revenue Generated:
The Tribunal noted that the assessee must prove the relevance of the expenses to the revenue generated and provide details of the service providers. The assessee submitted a list of service providers and argued that the primary duty of onus of proof was fulfilled by making payments through cheque and deducting relevant taxes. However, this was not sufficient to replace the relevance of expenses as per the case of K. V. Minerals v. Addl. CIT.

6. Partial Acceptance of Commission Payments by the Tribunal:
The Tribunal found that the Revenue's investigation had some flaws, such as the stereo-typed statements from the 3 lady agents and the lack of evidence on whether these agents declared the commission as income. Given these peculiarities, the Tribunal decided to allow the commission payments to the extent of the 12 agents who confirmed providing services to the assessee, while upholding the disallowance for the 3 agents who denied any business connection. Consequently, the appeal was partly allowed.

Conclusion:
The appeals for both assessment years 2010-11 and 2011-12 were partly allowed, with the Tribunal directing the Assessing Officer to allow the commission payments for the agents who confirmed their services and disallowing the payments for those who denied any business connection.

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