2018 (11) TMI 429 - AT - Income Tax

Disallowance of commissions expenses - Held that - It has come on record that this assessee is engaged in highly level employees requirement business. He declared income from the said business activity amounting to ₹198.70 lakh along with commission of ₹79.55 lakh debited in the profit and loss account. AO disallowed a part thereof to the extent of the impugned sum of ₹51,56,694/- mainly on the ground that the corresponding parties did not support his case. All the corresponding payments have been subjected to TDS; wherever necessary. There has not been any enquiry on part of the AO to find out as to whether all these parties who have not supported assessee s case have claimed the corresponding TDS credit or not is respective tax records. Coupled with this, we find that the AO has also not carried out the necessary verification on assessee s ultimate customers/clients who have appointed the highly qualified personnel through the assessee. Thus uphold the CIT(A) s findings deleting the impugned disallowance under challenge. - Decided against revenue. Deduction/ Exemption of LTCG u/s 54F - use of ground floor as commercial purpose and other three floor for residential purpose - The question that arises for our consideration is as to whether the CIT(A) has rightly apportioned assessee s deduction to 25% is to 75%; floor-wise or not - Held that - Our instant adjudication supports the CIT(A) s action to this effect as he has rightly proceeded on an assumption that section 54F is a deduction provision to the liberally construed. This is not the Revenue s case that the 3 floors of the building in question are not used for residential purposes. We therefore affirm the CIT(A) s findings under challenge restricting the assessee s deduction claim to the extent residential portion of the building only by treating the same to be a residential house as per the true legislative intent u/s 54F - Decided against revenue.

Summary

Issues Involved:

1. Disallowance of commission expenses of ?51,56,694.
2. Disallowance of section 54F deduction claimed of ?56,52,242, restricted to ?42,39,181.

Issue 1: Disallowance of Commission Expenses

The Revenue challenged the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to reverse the Assessing Officer (AO)'s disallowance of commission expenses amounting to ?51,56,694. The assessee, engaged in manpower recruitment, claimed these expenses as deductions. The AO disallowed the expenses on the grounds that the parties to whom the commission was paid denied using the services of the commission agents.

The CIT(A) found that the assessee provided detailed evidence including the names, addresses, PAN details of the agents, bills issued, details of services rendered, and proof of TDS deductions. The CIT(A) criticized the AO for not examining the commission agents and failing to understand the business process, which involves discreet information crucial for placing senior-level executives. The CIT(A) concluded that the AO's inquiry with the candidates was irrelevant as the candidates might not remember the agents involved in their placement. The CIT(A) referenced several case laws supporting the allowance of commission payments as business expenses.

The Tribunal upheld the CIT(A)'s findings, noting that the AO did not verify whether the parties claimed the corresponding TDS credit in their tax records and did not investigate the assessee's ultimate clients. The Tribunal found that similar commission payments were accepted in subsequent assessment years, thus affirming the CIT(A)'s decision to delete the disallowance.

Issue 2: Disallowance of Section 54F Deduction

The Revenue also contested the CIT(A)'s decision to reverse the AO's disallowance of the section 54F deduction claimed by the assessee for ?56,52,242, which was restricted to ?42,39,181. The assessee sold a property and invested in constructing a new building, which was sanctioned as both residential and commercial. The AO disallowed the entire deduction, arguing that the building's commercial nature disqualified it from section 54F benefits. The AO, based on an ITO's inspection, estimated the residential portion's cost at 15% of the total construction cost.

The CIT(A) found that the building was primarily residential, with no commercial activities observed during inspection. The CIT(A) held that section 54F, being a beneficial provision, should be liberally interpreted. The CIT(A) determined that 75% of the building was residential and allowed the deduction accordingly, restricting it to ?42,39,181 (75% of ?56,52,242).

The Tribunal supported the CIT(A)'s approach, agreeing that section 54F should be liberally construed. The Tribunal noted the assessee's fair declaration of the ground floor as commercial and the remaining floors as residential. The Tribunal affirmed the CIT(A)'s apportionment of the deduction, treating the residential portion as "a residential house" under section 54F.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The commission expenses disallowance was deleted, and the section 54F deduction was restricted to the residential portion of the new building.