2017 (12) TMI 1403 - AT - Income Tax

Disallowance of commission u/s 40A(2)(b) - contention of the AR that the amount of commission which was paid to both the HUFs was the minimum amount of commission decided, irrespective of the sales made by the assessee firm through such parties - Held that - There is nothing on record either in terms of written agreement or understanding between the assessee and these two HUFs or even where the agreement/understanding is verbal, the onus is on the assessee to bring on record some evidence by way of confirmation etc., which defines and lays down the terms of such engagement in terms of sales target, target customers/area, years of engagement, etc. The assessee has thus failed to discharge the said onus cast on it. Secondly, regarding the determination of excessive amount of commission so paid and the comparative cases whereby the onus is cast on the AO, we find that where the assessee itself is paying commission to other entities on the sales so made through them and where there is nothing on record to distinguish the nature of services so rendered by these entities vis- -vis two HUFs, the said internal comparable cases have been rightly applied by the AO. In these comparable cases, the assessee itself is paying commission which ranges between 27% to 37% and in the instant case, the AO has thus taken the average of such commission which comes to 33%, compared it with the actual commission so paid by the assessee and has determined the excessive commission payment. We therefore donot find any infirmity in the action of the AO who has rightly disallowed the excessive commission under the provisions of section 40A(2)(b) - Decided against assessee Disallowance of supervision charges - Held that - the assessee firm has not brought on record any evidence through which it can be verified that such supervision services have been rendered or availed by the assessee firm. It is no doubt true that the payments have been made to these entities during the year and these entities have also filed the confirmations of receipt of such charges, however, the fact of payment is ancillary and secondary to the rendering of services or availment of supervision services and cannot be a basis to hold that since the payment have been made, the services ought to have been rendered or availed by the assessee firm. The payment is the consideration towards the discharge of consideration for rendering of services and unless such rendering of services is not proved, as in the instant case, mere payment is not sufficient enough to hold that the expenditure has been incurred and allowable in the hands of the assessee firm. Further, it is not a case that the AO has not taken any action to verify the transaction. He has issued notices under section 133(6) and when he was not convinced with the replies, he also issued summons under section 131 as well which remain uncomplied with and which has put further question mark on the authencity of the transaction under consideration. We have also gone through the assessment order passed under section 143(3) for AY 2012-13 wherein the AO noticed that various expenses such as carriage inwards, diesel and oil expenses, loading charges, supervision charges and unloading charges were made in cash and no supporting evidence has been maintained and were not verifiable and the AO has thus rejected the books of accounts u/s 145(3) of the Act and has made lump sum trading addition thereof. Hence, it cannot be said that the supervision charges were allowed by the AO for the AY 2012-13. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of commission under Section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of supervision charges claimed as business expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Commission under Section 40A(2)(b):

The assessee, a partnership firm engaged in the business of magnetic sorting of iron ore, paid a commission of ?5,00,000 each to two HUFs, which are specified persons under Section 40A(2)(b) of the Income Tax Act. The Assessing Officer (AO) issued a show cause notice questioning the excessive commission payment. The assessee argued that the commission was paid on a lump sum basis and not on a fixed percentage of turnover. However, the AO observed that the commission paid to other parties ranged between 27% to 37%, averaging 33%, whereas the commission to the two HUFs was at 97%. The AO restricted the commission payment to 33%, disallowing the excess amount of ?6,58,553.

The CIT(A) upheld the AO's decision, noting that the assessee failed to justify the lump sum payment and did not provide any agreement or evidence to support the excessive commission. The assessee's contention that the AO cannot question the business decisions was rejected, emphasizing the AO's duty to examine payments under Section 40A(2)(b).

During the hearing, the assessee reiterated that the commission was a minimum amount agreed upon irrespective of sales. The assessee argued that the AO failed to provide comparable instances to substantiate the claim of excessiveness. However, the Tribunal found that the assessee did not substantiate the minimum commission agreement and upheld the AO's use of internal comparable cases. The AO's action of disallowing the excessive commission was deemed appropriate, and ground no. 1 was dismissed.

2. Disallowance of Supervision Charges:

The assessee claimed supervision charges amounting to ?39,50,000, paid to seven parties. During the assessment, the AO found the assessee's responses vague and unsatisfactory. Notices issued under Section 133(6) to the parties resulted in identical replies lacking specific details about the supervision services. Summons under Section 131 were issued to five parties, but none appeared, and similar letters with reasons for non-appearance were submitted.

The AO disallowed ?30,00,000 of the supervision charges, questioning the genuineness of the transactions and the actual performance of services. The CIT(A) confirmed the disallowance, noting the lack of documentary evidence and the failure of the parties to appear before the AO. The CIT(A) also highlighted that similar supervision charges were disallowed in the previous assessment year.

The assessee argued that the AO had the authority to enforce attendance and that disallowing the charges for non-appearance was unjustified. The assessee also pointed out that similar charges were accepted in the previous year. However, the Tribunal found that the assessee failed to demonstrate the actual rendering of supervision services and upheld the CIT(A)'s findings. The Tribunal noted that the AO had taken steps to verify the transactions, and the lack of compliance with summons further questioned the authenticity of the charges. Ground no. 2 was dismissed.

Conclusion:

The appeal of the assessee was dismissed, with both grounds of disallowance upheld by the Tribunal. The Tribunal emphasized the necessity for the assessee to substantiate claims with verifiable evidence and the AO's duty to examine the reasonableness of payments under the Income Tax Act.