2020 (3) TMI 170 - AT - Income Tax

Genuineness of expenditure - payment of referral commission - Expenditure wholly and exclusively for the purpose of business of the assessee - HELD THAT - This is not client referral by M/s. Divine Alloys and Power Company Limited but is the commission referral by M/s. Elecon Engineering. The assessee has been unable to produce any communication between M/s. Divine Alloys and Power Company Limited and the assessee, specifying the details of the transaction that the said M/s. Divine Alloys and Power Company Limited has done with M/s. Elecon Engineering which has led to the increased turnover. The submissions as made by the assessee before the CIT(A) clearly shows that the turnover has increased on account of the assessee s own activity of getting the business from M/s. Elecon Engineering. It is not understandable as to why on the basis of the advice of M/s. Elecon Engineering, M/s. Divine Alloys and Power Company Limited had to be brought into the picture for the payment of referral commission . Nor has any evidence been brought to show what is the reference done by M/s. Divine Alloys and Power Company Limited and the quantum of turnover on account of such reference. The statement of the assessee before the learned CIT(A) itself shows that M/s. Divine Alloys and Power Company Limited has not done anything, nor provided any services in respect of the transactions with M/s. Elecon Engineering. If the so-called client referral as made by the assessee in respect of M/s. Divine Alloys and Power Company Limited was effective, why was it that the assessee had only one year transaction with M/s. Elecon Engineering? Once the reference is made and the products of the assessee are of the top notch quality, the turnover should have been climbing instead of falling back to earlier levels. This clearly shows that the assessee has been unable to prove the purpose of the payment to M/s. Divine Alloys and Power Company Limited much less that it was wholly and exclusively for the purpose of the assessee s business. The assessee has not been able to place any agreement before any of the authorities below nor has it produced before us. The assessee states that the consolidated bill was produced by the assessee whereas M/s. Divine Alloys and Power Company Limited had produced five bills but even that has not been produced before the Tribunal nor it has been proved that the expenditure has been incurred wholly and exclusively for the purpose of business of the assessee. Facts clearly shows that the assessee has failed to substantiate much less proved the reason for the payment of the so-called referral commission to M/s. Divine Alloys and Power Company Limited. Appeal of the Revenue stands allowed.

Summary

Issues:
Appeal against deletion of disallowance of commission paid to M/s. Divine Alloys and Power Company Limited for "client referral".

Analysis:
The Revenue appealed against the deletion of disallowance of commission paid to M/s. Divine Alloys and Power Company Limited for "client referral" by the learned Commissioner of Income Tax (Appeals). The Revenue argued that the assessee failed to prove the expenditure was incurred wholly and exclusively for business purposes as no agreement or evidence of services rendered was provided. The Assessing Officer disallowed the claimed commission due to lack of proof, which the CIT(A) overturned. The Revenue contended that the order should be reversed, citing the need for proof of services rendered and expenditure purpose.

The Departmental Representative relied on the Supreme Court decisions in Umakant B. Agarwal and Lachminarayan Madan Lal cases to support their argument. On the other hand, the Authorized Representative for the Assessee claimed that the commission was for "referral business" and led to a substantial increase in turnover. They cited the decision in Commissioner of Income Tax vs. Speciality Paper Company to support the deduction of commission payment. They argued that the Revenue's cited cases did not apply as the expenditure was proven in this case.

Upon reviewing the submissions, the Tribunal found that the assessee engaged M/s. Divine Alloys and Power Company Limited based on advice from M/s. Elecon Engineering, not for direct client referral. The turnover increase was attributed to the assessee's efforts, not due to services of M/s. Divine Alloys and Power Company Limited. The Tribunal noted the lack of communication or evidence of services provided by M/s. Divine Alloys and Power Company Limited, casting doubt on the purpose of the commission payment.

The Tribunal concluded that the assessee failed to substantiate the purpose of the commission payment to M/s. Divine Alloys and Power Company Limited for "client referral." As a result, the order of the CIT(A) was reversed, and that of the Assessing Officer was restored. The appeal of the Revenue was allowed, with no other issues argued or discussed during the proceedings.