2018 (11) TMI 124 - AT - Income Tax

Disallowance on account of commission paid - no genuine expenditure - Held that - Though the A.O. had made up his mind not to allow the expenses incurred /claimed by the assessee on account of commission charged by M/s Sumiti Alloys (P) Ltd., yet he had picked up the gross figure of ₹ 90,72,893/- while overlooking the fact that service tax amounting to ₹ 8,47,242/- was included in the total figure of ₹ 90,72,893/-. It may be worth pointing out here that the assessee had claimed expenses to the tune of ₹ 82,25,651/- through its P & L Account (and not ₹ 90,72,893/-) CIT(A) had touched the issue relating to commission on export sales, and recorded However keeping in view the fact that the said Sumiti Alloys (P) Ltd. is based at Ghaziabad and there is no evidence in support of its experience/connections for enabling export sales, commission on export sales also does not appear genuine, in the light of the finding of enquiry made above, which shows that the said partly had colluded with appellant in fraudulently providing entry for commission payment . CIT(A) s remarks does not appear genuine , itself shows that even the Ld. CIT(A) was not sure that such expense was non-genuine. Moreover, the Ld CIT(A) had not brought on record any evidence/ material to show that such expenses were not genuine. - Decided in favour of assessee.

Issues Involved:

1. Jurisdiction of CIT(A) to make additions/disallowances.
2. Addition/disallowance without issuing specific notice to the assessee.
3. Allowability of entire expenses claimed on account of commission.
4. Incorrect figure used for addition/disallowance by CIT(A).
5. Justification for disallowing commission expenses based on presumption/assumption.

Issue-wise Detailed Analysis:

1. Jurisdiction of CIT(A) to make additions/disallowances:
The Assessee contended that the CIT(A) illegally assumed jurisdiction to make additions by doubting the genuineness of the commission paid to M/s Sumiti Alloys (P) Ltd. The AO had not made any addition on this account, and the adhoc disallowance made by the AO at 5% was deleted by the CIT(A). The Tribunal found that the CIT(A) had not issued a notice to the assessee requiring it to show cause against such enhancement, which is a violation of sub-section (2) of section 251. The Tribunal cited several precedents, including Gedore Tools Pvt. Ltd. Vs. CIT and Spandana Foundation Vs. ADIT, to support its view that the CIT(A)'s action was illegal.

2. Addition/disallowance without issuing specific notice to the assessee:
The Assessee argued that the addition/disallowance made by the CIT(A) without issuing any specific notice was unsustainable. The Tribunal agreed, emphasizing that the CIT(A) must provide a reasonable opportunity for the assessee to show cause against any enhancement of income as determined by the AO. This procedural lapse rendered the CIT(A)'s action invalid.

3. Allowability of entire expenses claimed on account of commission:
The Assessee claimed that all expenses on account of commission should have been allowed. The Tribunal noted that M/s Sumiti Alloys (P) Ltd. had rendered services and charged a commission for facilitating sales. The Tribunal referenced the Supreme Court decision in CIT Vs. Dhanrajgiiji Raja Narasingirji, which held that it is for the assessee to decide how best to protect its interests. The Tribunal found that the commission expenses were commercially expedient and allowable under section 37(1).

4. Incorrect figure used for addition/disallowance by CIT(A):
The Assessee pointed out that the CIT(A) used the figure of ?90,72,893/- for disallowance, whereas the actual claimed expenses were ?82,25,651/-. The Tribunal confirmed that the CIT(A) had incorrectly included the service tax amount in the total figure. The correct amount of commission expenses should have been ?82,25,651/-, as detailed in the assessee's P&L account.

5. Justification for disallowing commission expenses based on presumption/assumption:
The CIT(A) disallowed ?29,87,722/- of commission expenses on export sales, based on the assumption that M/s Sumiti Alloys (P) Ltd. lacked the experience/connections for enabling export sales. The Tribunal found that the CIT(A)'s remarks "does not appear genuine" indicated uncertainty and were not supported by any adverse material. The Tribunal emphasized that the CIT(A) had misdirected himself by making inquiries from unrelated government departments and had not brought any evidence to show that the expenses were non-genuine.

Conclusion:
The Tribunal quashed the order of the CIT(A) on both legal and merit grounds, deleting the addition in dispute. The appeal of the assessee was allowed, and the order was pronounced in the Open Court on 29-10-2018.

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