2019 (7) TMI 1325 - HC - Income Tax

Disallowance of commission expenditure - Rule of consistency - the commission amounts were deposited on a particular date and within two day the same or marginally higher amounts were withdrawn - HELD THAT - This Court notices that the issue of disallowance has been consistently and concurrently ruled against the assessee. The CIT(A) in this regard noticed that the assessee was impressed upon with the need for verification of commission expenses repeatedly in December, 2016 and January, 2017. Despite this, the assessee did not produce a single witness. Summons were issued to ten witnesses under Section 131. Three from the list of ten persons replied. None of these individuals, in fact, appeared before the AO for verification and inquiry. Even the replies by the three parties were unsatisfactory. On this aspect, this Court notice that CIT(A) has extracted relevant details with respect to the concerned parties which shows, prima facie, that the amounts were deposited on a particular date and within two day the same or marginally higher amounts were withdrawn. This Court is of the opinion that all three authorities i.e. AO, CIT(A) and ITAT scrutinized the record and held that the commission claimed, was not supportable in law and therefore, disallowed the deduction claimed, the only ground on which the court could, if at all entertain the appeal is that the basis for such disallowance was entirely nonexistent. Such an argument in the opinion of the court is insubstantial in cases like present. In court s opinion, the reliance upon the so called rule of consistency in Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT did not bar the revenue authorities from carrying out their task independently and as they did discharge in respect of the assessment in question. That in the past year or years, the orders made no doubt provide a guide as to the nature of business and the manner in which the assessing authorities adopted the method of assessing income. The method adopted by AO for completing the task, however, does not preclude in any manner the conducting of independent scrutiny of the material presented before the assessee in later years. The rule of consistency in the opinion of the court does not preclude the AO from conducting inquiry which he is bound by law to do, for determining in law what are the true and correct amounts, to determine the amounts legally chargeable as tax - No substantial question of law arises and the appeal is dismissed.

Summary

Issues:
Disallowance of commission expenditure under Income Tax Act - Unsustainable basis, Arbitrary disallowance, Rationale for disallowance, Verification of commission expenses, Rule of consistency in expenditure claims.

Analysis:
The assessee contested the disallowance of commission expenditure amounting to ?97,98,305, arguing that it was made on an arbitrary basis without proper rationale. The company, engaged in the business of pipes, sanitary wares, and trading of irrigation pipes, declared its total income as ?46,08,958 for the Assessment Year 2013-14. The Assessing Officer (AO) assessed the income at ?1,43,79,630 and disallowed the commission expenditure. The assessee's appeal to the Commissioner of Income Tax (CIT) was rejected, and the Income Tax Appellate Tribunal (ITAT) also ruled against the assessee.

The counsel for the assessee highlighted that similar commission expenditure in previous years had only resulted in marginal disallowances, questioning the 100% disallowance in the current year. The assessee provided all relevant documents related to the commission payments, including Income Tax Returns (ITR) and payment evidence for each party. The counsel argued that payments were made through banking channels, with TDS deductions, and the parties involved had legitimate reasons for utilizing the amounts received.

The court observed that the issue of disallowance had been consistently ruled against the assessee by all authorities. The CIT noted the lack of witness production by the assessee despite repeated requests for verification. Summons were issued to ten witnesses, but only three responded, with unsatisfactory replies. The CIT highlighted discrepancies in the deposit and withdrawal patterns of the parties claiming commission, casting doubt on the genuineness of the expenses.

The court emphasized that the AO, CIT, and ITAT had scrutinized the records and unanimously disallowed the commission claimed by the assessee. The court rejected the argument that the basis for disallowance was nonexistent, stating that the rule of consistency did not prevent revenue authorities from independently assessing expenses. The court dismissed the appeal, concluding that no substantial question of law arose, and upheld the disallowance of the commission expenditure.

In conclusion, the judgment reaffirmed the importance of substantiating business expenses, the need for proper verification, and the authority of revenue officials to independently assess claims despite past practices. The rule of consistency does not override the legal obligation to verify expenses and determine the correct taxable amounts.