2018 (10) TMI 1284 - AT - Income Tax

Disallowance of commission expenses u/s. 40(A)(2)(b) - unreasonable and excess payment of expenses - Held that - The assessee has substantiated the payment of commission with supporting materials, debit notes etc along with the details of services rendered for which commission was paid. It is also undisputed facts that these two persons were also paid commission along with salary in the past years. The provision of section 40(A)(2)(b) provide for disallowance of only the excessive or unreasonable expenditure and not the entire expenditure. AO has failed to disprove supporting material furnished by the assessee in support of the aforesaid commission payment. AO has also failed to substantiate with relevant material that commission payment made by the assessee is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment has been made. AO to disallow the entire commission expenses u/s. 40A(2)(b) of the act without substantiating and restricting the disallowance to the unreasonable and excess payment of expenses is not correct. - Decided in favour of assessee.

Summary

Issues:
Disallowance of commission expenses of ?15,50,035/- by assessing officer.

Analysis:
The case involved an appeal for the assessment year 2012-13 regarding the disallowance of commission expenses of ?15,50,035/- by the assessing officer under section 143(3) of the Income Tax Act, 1961. The assessing officer observed an increase in commission expenses despite a decrease in turnover, leading to scrutiny of the case. The commission was paid to two individuals covered under section 40(A)(2)(b) of the Act. The assessee provided explanations regarding the services rendered by these individuals, but the assessing officer considered the payments excessive and unjustified, thus disallowing the entire amount. The CIT(A) upheld the assessing officer's decision, stating that the excessive nature of the payments was not justified by the appellant. However, during the appellate proceedings, the assessee presented supporting documents and argued that the assessing officer failed to prove the excessive nature of the payments. The Tribunal noted that section 40(A)(2)(b) allows disallowance only for excessive or unreasonable expenditure, not the entire amount. Consequently, the Tribunal disagreed with the CIT(A) and allowed the appeal, emphasizing the assessing officer's failure to substantiate the excessive nature of the commission payments.

In conclusion, the Tribunal found that the assessing officer did not provide sufficient evidence to support the disallowance of the entire commission expenses. The Tribunal emphasized that section 40(A)(2)(b) only allows disallowance of excessive or unreasonable expenditure, which was not adequately proven in this case. Therefore, the Tribunal allowed the appeal of the assessee, overturning the decisions of the assessing officer and the CIT(A).