2016 (11) TMI 973 - HC - Income Tax

Business expenses being commission on sales paid disallowed - Held that - The arguments is that in order to turn down the claim for expenditure the demand of the above quoted Section 40 (1) and (2) of the Income Tax Act should have been met with and reasons should have been supplied. No reason has been supplied for turn down the claim at 15%. The arguments is also that dis-allowance would have been such expenditure, which is excessive or unreasonable having regard to the fair market value of the goods then alone it could have been turned down. There is not even a whisper in the order of the tribunal that the claim made by the assessee is either unreasonable or excessive. No comparative data has been examined. No evidence there too was produced as to how such business allowance are to be made. In view of the above, it would be in the interest of justice that the matter should be re-examined again after giving opportunity of hearing to the parties and fixing date in the matter. The matter be decided having regard to the above quoted sections 40 A (1) and (2) of the Income Tax Act within three months from the date of production of a certified copy of this order before the Tribunal.

Issues involved:
1. Disallowance of business expenses on commission by the Tribunal.
2. Interpretation of Sections 40A(1) and 40A(2) of the Income Tax Act.
3. Justiciability of quantum of commission paid.
4. Legality and arbitrariness of restricting sales commission to 10% of turnover.
5. Basis of disallowance of 5% of sales turnover as per Tribunal's order.

Analysis:

1. Disallowance of business expenses on commission by the Tribunal:
The appellant filed an appeal against the Tribunal's order disallowing business expenses on commission paid at 15% and restricting it to 10% of sales turnover. The key issue raised was whether the Tribunal's decision was justified given the admitted need to pay commission and the actual payments made. The Tribunal's decision was challenged on the grounds of lack of proper examination and reasoning, with the appellant arguing that the Tribunal did not provide adequate justification for the disallowance.

2. Interpretation of Sections 40A(1) and 40A(2) of the Income Tax Act:
The appellant contended that the Tribunal failed to apply the provisions of Section 40A(1) and 40A(2) of the Income Tax Act, which govern the disallowance of excessive or unreasonable expenditures. The appellant argued that the Tribunal did not meet the requirements set out in these sections for disallowing the claimed expenditure at 15%. The appellant emphasized the need for reasons to be provided when disallowing business expenses and highlighted the absence of comparative data or evidence to support the disallowance.

3. Justiciability of quantum of commission paid:
The issue of whether the quantum of commission paid is justiciable was raised, questioning the Tribunal's authority to estimate and restrict the commission amount to 10% of sales turnover. The appellant argued that such estimation should be based on specific criteria outlined in the Income Tax Act, and the Tribunal's decision lacked the necessary reasoning or evidence to support the restriction imposed.

4. Legality and arbitrariness of restricting sales commission to 10% of turnover:
The appellant challenged the legality and arbitrariness of the Tribunal's decision to limit the sales commission paid by the appellant to 10% of the sales turnover. It was argued that such a restriction was not supported by any cogent material, evidence, or reasoning, and the Tribunal's decision was deemed as purely based on presumptions and conjectures rather than factual analysis.

5. Basis of disallowance of 5% of sales turnover as per Tribunal's order:
The Tribunal's decision to disallow 5% of the sales turnover as sales commission was scrutinized for its basis and justification. The appellant highlighted the lack of reasoning or evidence provided by the Tribunal to support this disallowance, emphasizing the need for adherence to the provisions of the Income Tax Act and the requirement to demonstrate the excessive or unreasonable nature of the claimed expenditure.

In conclusion, the High Court set aside the Tribunal's order and remanded the matter back for re-examination, emphasizing the importance of applying the relevant provisions of the Income Tax Act and providing proper justification for any disallowances of business expenses.

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