2020 (5) TMI 397 - AT - Income Tax

Disallowance of commission expenses u/s.37 - AO observed that these payments of commission is not justifiable and it is nothing but inflation of expenses by the assessee company in order to reduce its tax liability - Non speaking order by CIT-A - HELD THAT - AO has brought out a case of tax evasion by the assessee company and when we peruse the order of the Ld. CIT(Appeals), he has not passed a speaking order. He has summarily disposed of the appeal of the assessee with a cryptic order which is devoid of any reasons on facts. CIT(Appeals) also did not deal with each and every factual aspect as brought out by the AO in his order. That even after having power co-terminus with that of the Assessing Officer, the Ld. CIT(Appeals) has not conducted any verification or enquiry as to the modus of operation of the assessee company and whether the finding brought on record by the Assessing Officer is correct or not, nothing has been specifically dealt with in his order. CIT(Appeals) has also mentioned in his order that Since each assessment year is separate in itself, facts needs to be verified. Set aside the order of the Ld. CIT(Appeals) and remand the matter back to his file for passing a speaking order - Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of commission expenses paid to group companies.
2. Justification of commission payment by the assessee.
3. Allegation of inflating expenses to reduce tax liability.

Analysis:
1. The appeal involved the disallowance of commission expenses paid by the assessee to certain group companies. The assessee contended that the commissions were paid for educating villagers/farmers about their products, leading to increased sales. In contrast, the Revenue alleged that these expenses were inflated to reduce tax liability, constituting a colorable device to defraud the government of rightful revenue.

2. The Assessing Officer highlighted discrepancies in the related companies, shared personnel, and lack of infrastructure in the allotted marketing regions. It was observed that the commission payments were not for genuine business purposes, leading to the disallowance of ?46,74,617 under section 37 of the Income Tax Act. The AO emphasized the need for the assessee to produce evidence supporting the legitimacy of the commission work carried out by the related companies.

3. The Ld. CIT(Appeals) upheld the AO's decision, emphasizing that the primary activities of the group companies did not align with the marketing activities for which commissions were paid. The CIT(A) noted that the expenses were shifted to related concerns with minimal tax liabilities, resulting in tax evasion. The CIT(A) dismissed the appellant's argument citing a Supreme Court judgment on business expenditure, stating that the facts were not applicable to the case. The CIT(A) directed the assessee to verify facts for each assessment year separately.

4. The ITAT Pune set aside the CIT(A)'s order, citing lack of detailed reasoning and failure to conduct necessary verifications. The ITAT remanded the matter back to the CIT(A) for a speaking order, urging the assessee to provide all relevant details and evidence for a thorough adjudication. The appeal was allowed for statistical purposes, emphasizing compliance with natural justice principles.

This comprehensive analysis of the judgment highlights the issues, arguments, and decisions made by the authorities involved, ultimately leading to the remand of the case for further examination and a detailed order.