2020 (6) TMI 647 - AT - Income Tax

Ingenuine Commission expenses - whether the commission payments made by the assessee to the above agents are genuine and are allowable expenditure u/s 37(1) - HELD THAT - Payment of commission was a normal trade practice in the line of business, and every business man pays commission to procure business. Assessee in order to prove its case has provided documents viz. copy of agreement entered into by the assessee and the agents, which inter alia provide the appointment and scope of the work of the assessee. Capacities of the agents to act as agents of the assessee and the business they have performed for the assessee have not been doubted. The commissions were paid in relation to the business procured by agents from various locations as indicated in the details furnished by the agents. Such commission payments were in the form of account payee cheques, and in order to evidence the genuineness of transactions of commission received by the agents, these agents have provided a summary of commission received from various companies including that of the assessee. They have also filed copies of form no.26AS showing details of TDS against the receipt of commissions, therefore, a live link between the business of the assessee and payments made to the agents have been established. These independent evidences produced by the assessee would prove that services were rendered by the agents, which have not been disputed by the Revenue. Revenue authorities doubted the payment of commissions merely on the facts that agents are related to the assessee, and that commission expenses were claimed to reduce the tax liability of the assessee company, which allegation was not supported by any independent finding. The agents have included the receipts in their return of income and that there was no evidence to show that the money has come back to assessee so as to allege that the transactions are bogus to avoid tax by reducing the profit. In the assessee s case, relevant conditions laid out in section 37(1) have been fulfilled. Therefore, the commission expenses paid was in the nature of business expense which requires to be allowed as deduction. - Decided in favour of assessee.

Summary

Issues involved:
Appeal against confirmation of commission expenses as non-genuine by CIT(A) - Allowability of commission expenses under section 37(1) of the Income Tax Act.

Detailed Analysis:

Issue 1: Confirmation of Commission Expenses
The assessee appealed against the order of the ld.CIT(A)-2, Vadodara confirming commission expenses of ?22,31,200 as non-genuine. The AO initially disallowed a total of ?25.00 lakhs out of ?30,66,480 commission expenses, suspecting diversion of profits for tax minimization. The AO presumed certain payments as bogus, mainly those to family members of the director. The ld.AO rejected the explanations and evidence provided by the assessee regarding the necessity of experienced marketing team for business activities. The First Appellate Authority upheld the AO's decision but allowed a partial relief of ?2,68,800. The Tribunal was approached by the assessee against the remaining confirmed amount of ?22,31,200.

Issue 2: Admissibility of Commission Expenses
The Tribunal analyzed the genuineness of commission payments made by the assessee to various agents. The Tribunal observed that to claim expenditure under section 37(1) of the Income Tax Act, certain conditions must be met, including that the expenditure should be laid out wholly and exclusively for business purposes. The Tribunal noted that commission payments were a common trade practice and that the assessee provided documents such as agreements with agents to support the legitimacy of the expenses. The Tribunal found that the agents had the capacity to act on behalf of the assessee, and payments were related to business procured from various locations. The Tribunal highlighted that the commissions were paid through account payee cheques, and agents had provided evidence of commission received from various companies, including the assessee. The Tribunal concluded that the commission expenses were of a revenue nature, expended for business purposes, and directed the AO to allow the claimed commission expenditure.

Conclusion:
The Tribunal allowed the appeal of the assessee, emphasizing that the commission expenses were genuine, supported by proper documentation, and fulfilled the conditions under section 37(1) of the Income Tax Act. The Tribunal found no evidence to support the Revenue's doubts regarding the legitimacy of the commission payments, ultimately directing the AO to allow the claimed commission expenditure.