2019 (1) TMI 737 - AT - Income Tax

Disallowance of payment of commission - Held that - During the year under consideration, the Assessing Officer undertaken the exercise of enquiry and verification of the claim of the assessee. It is settled proposition of law that the onus is on the assessee to establish that the expenditure is incurred wholly and exclusive for the purpose of business. In order to establish the claim of expenditure wholly and exclusively lend out for the purpose of business, the assessee is required to produce supporting evidence to show that the expenditure was incurred against the services rendered by these persons. We find that, though the assessee has filed confirmation from the persons and the payment was made after deduction of TDS, however, when the AO has issued the summons to ten persons, none has appeared before the Assessing Officer and only three persons responded to the summons issued by the AO. As far as enquiry conducted by the AO in respect of the persons who whom summons were issued it was brought on record that the assessee has claimed the expenditure without any agreement with any of the parties and further some of the parties as noted by the Assessing Officer has not filed return of income. The fact that the amount was transferred at the fag end of the financial year in the accounts of these parties and immediately thereafter was withdrawn again shifting the burden on the assessee to prove the claim of expenditure. Therefore, to the extent of the expenditure on which the Assessing Officer has conducted enquiry, the assessee failed to disprove the enquiry conducted by the Assessing Officer. Since the Assessing Officer has not conducted any enquiry in respect of the remaining parties, therefore, we restrict the disallowance to the extent of the amount paid to the ten persons in respect to whom the Assessing Officer has conducted the enquiry. Accordingly the disallowance made by the Assessing Officer is restricted only to the ten persons and the remaining disallowances made by the Assessing Officer without conducting a proper enquiry is deleted. As clarified that once the assessee has filed the relevant documents in support of the claim and the Assessing Officer has conducted enquiry in respect of the part of the claim to disprove the documents filed by the assessee then so far as the claim which has been supported by the documentary evidence and has not been disproved by the Assessing Officer through a proper enquiry, the same cannot be disallowed. - Appeal of the assessee is partly allowed.

Issues Involved:
1. Disallowance of commission expenditure of ?97,58,305/- by the Assessing Officer (A.O.).
2. Rejection of legitimate business expenditure by the A.O. and CIT(A).
3. Applicability of the rule of consistency in the assessment of commission expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Expenditure:
The primary issue revolves around the disallowance of ?97,58,305/- paid as commission by the assessee. The A.O. noted that the commission rate of 6.23% on sales appeared excessively high compared to the prevailing trade rates. The A.O. requested the assessee to produce the recipients for examination, but the assessee failed to do so. Summons issued to ten recipients under Section 131 of the Income Tax Act, 1961, resulted in non-appearance of the recipients, with only three responding. The A.O. found that the commission amounts were immediately withdrawn or transferred, raising suspicions of siphoning off funds. Consequently, the A.O. disallowed the entire commission payment.

2. Rejection of Legitimate Business Expenditure:
The assessee argued that the commission payments were legitimate business expenditures, incurred wholly and exclusively for business purposes, and had been consistently allowed in previous years with only partial disallowances. The assessee provided confirmations, returns of income, and other details of the recipients, and contended that the disallowance of the entire commission was unjustified. The assessee cited the rule of consistency and relied on judicial precedents, including the Hon’ble Supreme Court's decision in Radhasoami Satsang Vs. CIT and the Hon’ble Delhi High Court's decision in CIT Vs. Amit Jain, asserting that the A.O. should not deviate from past assessments without distinguishing facts or materials.

3. Applicability of the Rule of Consistency:
The assessee emphasized the rule of consistency, highlighting that in previous years, the A.O. had only partially disallowed commission payments, restricted to 5% or ad hoc amounts. The assessee argued that the A.O. was bound to follow this rule and should not have disallowed the entire commission for the current year. The A.O., however, argued that the doctrine of res judicata does not apply to taxation matters and presented a case of siphoning money through bogus claims. The A.O. noted that the commission rate was unusually high, and the assessee failed to establish the services rendered by the recipients.

Tribunal’s Findings:
The Tribunal considered the rival submissions and relevant material on record. It noted that in previous years, disallowances were ad hoc due to the lack of supporting evidence. For the current year, the A.O. conducted a detailed enquiry, issuing summons to ten recipients, but none appeared, and the responses received raised further doubts. The Tribunal highlighted that the onus is on the assessee to prove that the expenditure was incurred wholly and exclusively for business purposes. The Tribunal found that the assessee failed to produce evidence to support the commission payments and that the A.O.'s findings of immediate withdrawal or transfer of commission amounts were significant.

The Tribunal upheld the A.O.'s disallowance to the extent of the commission paid to the ten persons who were subject to enquiry. However, it restricted the disallowance only to these ten persons, deleting the disallowance for the remaining recipients for whom no proper enquiry was conducted. The Tribunal clarified that the A.O. cannot disallow claims supported by documentary evidence without disproving them through proper enquiry.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal restricted the disallowance of commission expenditure to the ten persons for whom the A.O. conducted an enquiry, while deleting the disallowance for the remaining recipients. The order was pronounced in the open court on 19/11/2018.

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