2022 (4) TMI 667 - AT - Income Tax

Disallowance of commission paid - excessive expense on commission - AO partly disallowed the commission paid to three parties on the ground that, such disallowed portion was excessive, more than average rate and the same were paid to related parties - HELD THAT - In so for commission paid to NRG Consultant Pvt. Ltd. is concerned, we found that, there was no marital available on record to suggest that, the said entity is either the Director or the share holder of the assessee to bring to the purview of related person . The basic requirement of applicability of Section 40A (2) of the Act is that, payment should be made to a related person i.e. to a person referred to in Clause (b), of sub-Section (2) of Section 40A of the Act. By respectfully following the ratio laid down in the case of Hero MotoCorp 2013 (8) TMI 57 - ITAT DELHI and V. S. Dempo Co. (P.) (Ltd.) 2010 (10) TMI 711 - BOMBAY HIGH COURT we hold that, in the absence of any material on record to show that NRG Consultant Pvt. Ltd. is a related person , the commission paid to NRG Consultant Pvt. Ltd. cannot be disallowed under section 40A(2) of the Act. Accordingly the said issue regarding the payment of commission made by the Assessee to NRG Consultant Pvt. Ltd. is allowed and decided in favour of the assessee. Payment of commission made to Trust Commodities Pvt. Ltd. and Miss. Seema Verma - The average rate of commission paid by the assessee to others in respect of Soybean meal was 12.5, but the rate of commission paid to Trust Commodities Pvt. Ltd. was 45 and the difference of rate of commission is 32.5%. Further, the average rate of commission paid by the assessee to others in respect of rice was 20, but rate of commission paid to Ms. Seema Verma was at 215 and the difference of rate of commission is at 195%. The said deference is not only excessive and the same is unrealistic in the market. The AO has rightly made the comparison of the average rate of commission paid by the assessee himself in the case of non related parties to come to the said conclusion. Further, the Ld. CIT(A) has also given specific opportunity to the counsel of the assessee to explain the reason for commission being extraordinary in excess over the average expenditure, but no substantive reason was furnished by the assessee even before CIT(A) proceedings. In our opinion, the said commissions paid to those two entities are not only excessive and also unrealistic compared to average rate of commission paid by the assessee itself. We uphold the disallowance made in respect of the payment of commission made by the Assessee to Trust Commodities Pvt. Ltd. and Miss. Seema Verma and decide the said issue in favour of the Revenue. Accordingly the Grounds of Appeal No. 1 to 3.2 are partly allowed. Whether CIT(A) has erred confirming the addition that was made against the principles of natural justice without confronting/cross examining to the third parties? - There is no iota of evidence to suggest that, the assessee has sought for cross examination of any of the parties before the lower authorities. Further assessee has became absolutely silent about its rights without seeking for cross examination of any of the parties concerned before the Lower Authorities, now at this stage assessee cannot take such plea before us. Accordingly Ground No. 4 is dismissed.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Treatment of related parties.
3. Excessive commission payments.
4. Violation of principles of natural justice.
5. Charging of interest under section 234B of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Commission Expenses:
The primary issue revolves around the disallowance of ?36,08,001/- as commission expenses claimed by the assessee. The assessee argued that the commission was incurred wholly and exclusively for business purposes, supported by agreements, contract notes, and invoices. However, the Assessing Officer (AO) found the commission payments excessive and disallowed them. The CIT(A) upheld this disallowance, leading to the present appeal.

2. Treatment of Related Parties:
The AO disallowed the commission payments by considering the recipients as related parties under Section 40A(2) of the Income Tax Act. Specifically, Trust Commodities Pvt. Ltd. (9% shareholding) and Ms. Seema Verma (17.05% shareholding) were deemed related parties. However, NRG Consultants Pvt. Ltd. was not found to be a related party. The Tribunal, following precedents, held that the commission paid to NRG Consultants Pvt. Ltd. cannot be disallowed under Section 40A(2) as it was not a related party.

3. Excessive Commission Payments:
The AO compared the commission rates paid to related parties with the average rates paid to other parties. For instance, the commission rate for Soybean Meal paid to Trust Commodities Pvt. Ltd. was 45% compared to an average of 12.5%, and for Rice, the rate paid to Ms. Seema Verma was 215% compared to an average of 30%. The Tribunal found these rates excessively high and unrealistic, justifying the disallowance. The assessee failed to provide substantive reasons for such high commissions even during the CIT(A) proceedings.

4. Violation of Principles of Natural Justice:
The assessee contended that the addition was made without confronting or cross-examining third parties, violating natural justice principles. However, the Tribunal noted that there was no evidence suggesting the assessee sought cross-examination before lower authorities. Hence, this ground was dismissed.

5. Charging of Interest under Section 234B:
The assessee challenged the charging of interest under Section 234B. The Tribunal held that charging interest is consequential and mandatory, requiring no further adjudication. Thus, this ground was dismissed.

Conclusion:
The appeal was partly allowed. The disallowance of commission paid to NRG Consultants Pvt. Ltd. was overturned as it was not a related party. However, the disallowance of commissions paid to Trust Commodities Pvt. Ltd. and Ms. Seema Verma was upheld due to excessive and unrealistic payments. The grounds related to natural justice and interest under Section 234B were dismissed. The Tribunal's decision emphasized adherence to statutory provisions and the reasonableness of business expenses.