2019 (5) TMI 1112 - AT - Income Tax

Disallowance u/s 37 - commission to the assessee s son - CIT(Appeals) allowed 50% of the commission to be paid in the case of assessee s son - HELD THAT - We find that when the rate of commission paid to other agents was on par with the rate paid to the assessee s son, merely because Shri Navneet Bagdi appears to be the assessee s son, the CIT(Appeals) is not justified in restricting the payment to 50%. Moreover, it is not the case of the Revenue that Shri Navneet Bagdi has not rendered any service. In those circumstances, the CIT(Appeals) ought to have allowed the claim of the assessee in toto. Therefore, the order of the CIT(Appeals) in respect of commission payment to Shri Navneet Bagdi is modified and the Assessing Officer is directed to allow the entire payment . Disallowance u/s 35(1)(ii) - Assessee involved in the sham transaction under the garb of donation - HELD THAT - The very fact that the transaction ultimately ended in refunding the money to the assessee through banking channel after reducing the commission to the extent of 5% shows that the money has come back to the assessee. This is the transaction arranged in such a way that the accommodation entries were made at several entities level and ultimately the money came back to the assessee. Herbicure Healthcare Bio-Herbal Research Foundation of Kolkata involved in the fraudulent and sham transactions, providing accommodation entries and claiming bogus weighted deduction to the extent of 175%. The antecedents of the recipient were unearthed by the Department during the course of survey operation. The material available on record clearly establishes that the so-called donation ultimately received back by the assessee after reducing the commission. CIT(Appeals) in a very reasoned order found that the assessee involved in the sham transaction under the garb of donation. addition confirmed.

Summary

Issues: Disallowance under Section 37 of the Income-tax Act, 1961 and disallowance under Section 35(1)(ii) of the Act.

Analysis:

1. Disallowance under Section 37 of the Income-tax Act, 1961:
The issue involved in this case was the disallowance of ?1,44,556 under Section 37 of the Income-tax Act, 1961. The assessee argued that the Assessing Officer disallowed payments made to various agents, including the assessee's son, for procuring orders and other business activities. The CIT(Appeals) restricted the disallowance to 50% for the son's commission. The Tribunal found that since the rate of commission paid to other agents was similar to that paid to the son, there was no justification for the restriction. The Tribunal directed the Assessing Officer to allow the entire payment to the son, amounting to ?2,89,112.

2. Disallowance under Section 35(1)(ii) of the Act:
The second issue revolved around the disallowance of ?3,50,000 under Section 35(1)(ii) of the Act for donations made by the assessee. The assessee claimed that the donations were made through legitimate banking channels. However, the Assessing Officer found that a donation made to a specific foundation was part of a sham transaction involving accommodation entries for a commission. The CIT(Appeals) confirmed the disallowance based on the fraudulent nature of the transaction. The Tribunal upheld the lower authorities' decision, stating that the money ultimately returned to the assessee after passing through various entities, indicating a sham transaction. The Tribunal found no reason to interfere with the lower authorities' order, confirming the disallowance.

In conclusion, the Tribunal partially allowed both appeals filed by the assessee, directing the Assessing Officer to allow the full payment to the son under Section 37 and confirming the disallowance of donations under Section 35(1)(ii) due to fraudulent transactions.