2022 (4) TMI 341 - AT - Income Tax

Disallowance of deduction of commission expenses - steep rise of an expenditure during a year - whether or not the same had been incurred by the assessee wholly and exclusively for the purpose of its business and; that the same is not in the nature of a capital expenditure? - HELD THAT - As per the mandate of law the allowability of an assessee s claim for deduction of an expenditure which may had witnessed an increase as in comparison to that of the preceding year is not dependant upon a corresponding increase in the sales/profits during the year, but solely on the fact that as to whether or not the same had been incurred by the assessee wholly and exclusively for the purpose of its business and; that the same is not in the nature of a capital expenditure; nor an expenditure incurred in the personal field; nor an expenditure incurred for any purpose which is an offence or prohibited by law. Interestingly, we find that not only both the lower authorities had by erroneously referring to the benefit test disallowed the assessee s claim for expenditure, but most surprisingly and rather beyond comprehension had restricted the said claim for deduction in the same ratio i.e., 5.44% in which sales for the year under consideration had witnessed an increase as in comparison to that of the immediately preceding year. We are unable to comprehend much the less subscribe to the aforesaid novel method adopted/subscribed to by the lower authorities, which we would not hesitate to observe is nothing short of an arithmetical formula adopted by the Assessing Officer for partly declining the assessee's claim for deduction of commission expenses. Although a steep rise of an expenditure during a year would raise serious doubts as regards the genuineness of the claim for deduction of the same by the assessee, but then, as observed by us hereinabove, the allowability or not of the same has to be tested as per the mandate of Section 37 of the Act; and not on the touchstone of satisfaction of the benefit test as had been done by the A.O in the present case. Thus as the disallowance of the assessee s claim for deduction of commission expenses is not based on any material or observations which would lead to an irrefutable conclusion that the said expenditure was either not genuine or; was not incurred wholly and exclusively for the purpose of assessee s business within the meaning of section 37(1) of the Act, therefore, we set-aside the order of the CIT(Appeals) and delete the addition made by the AO. Appeal of assessee allowed.

Summary

Issues:
Disallowance of commission expenses by AO and CIT(A) for assessment year 2013-14.

Analysis:
The appeal was filed against the order passed by the CIT(A) confirming the disallowance of commission expenses of ?8,29,120 made by the AO. The assessee, engaged in wholesale trading of coal tar products, had witnessed a decline in Net Profit rate. The Assessing Officer noted a significant increase in commission expenses compared to the previous year, questioning its justification. The AO rejected the explanation that the increase was due to marketing activities, restricting the deduction to a lower amount. The CIT(A) upheld the disallowance, leading to the appeal before the ITAT Raipur.

During the proceedings, the assessee argued that the increased commission expenses were for marketing through agents to boost sales. However, both lower authorities rejected this explanation without concrete evidence to prove the expenses were not genuine or not incurred exclusively for business purposes. The lower authorities erroneously applied a "benefit test" and restricted the deduction based on an arbitrary ratio of sales increase. The ITAT emphasized that the deductibility of expenses under Section 37 of the Income-tax Act is not contingent on a direct correlation with sales increase but on being incurred wholly and exclusively for business without being capital or personal in nature.

The ITAT found the disallowance lacked a solid basis and overturned the lower authorities' decision, deleting the addition of ?8,29,120 to the assessee's income. The judgment highlighted that while a significant expense increase may raise doubts, the decision should align with the provisions of the Act. The ITAT's decision was based on the lack of conclusive evidence proving the expenses were not genuine or not for business purposes, emphasizing adherence to legal requirements for expense deductions.

In conclusion, the ITAT allowed the assessee's appeal, setting aside the CIT(A)'s order and deleting the disallowed commission expenses from the assessment for the year 2013-14.