2022 (9) TMI 774 - HC - Income Tax

Allowable business expenditure - whether the commission paid by the assessee to various agents was allowable as deduction u/s 37? - commercial expediency - due discharge of onus by the Assessee - HELD THAT - The commercial expediency, the nature of business activity done by the assessee, are all to be taken into consideration while examining the nature of payment which has been effected. The assessee in no uncertain terms has stated that apart from facilitating procuring of raw material, the agents also facilitated in securing speedy payment to the assessee. This factor has not been taken note of by the Tribunal, which, in our opinion, is a very vital factor to decide the sustainability of the claim of the assessee. Tribunal was of the view that most of the companies with which the assessee had business transactions were all Government of India concerns. However, the Tribunal has failed to note that the AO has noted the names of all the 13 customers with whom the assessee had transactions and many of them are private limited companies and are not government entities. When the payments made by the assessee were for the purpose of procuring the business and to get the supplied items to be ensured that they have delivered to the customers and arrangement for speedy payment, the payment is in the nature of commission. That apart, for the earlier and subsequent assessment years the payments were never disallowed by the AO. Appeal of assessee allowed.

Summary

Issues:
1. Allowability of commission payment as deduction under Section 37 of the Income Tax Act, 1961.
2. Tribunal's decision on the nature of commission payments made by the assessee.
3. Burden of proof on the revenue to establish payments were not in the nature of commission.
4. Consideration of commercial expediency and business nature while determining the deductibility of commission payments.

Issue 1: Allowability of Commission Payment as Deduction:
The appeal questioned the Tribunal's decision on the deductibility of commission payments made by the assessee. The assessee contended that all necessary particulars for verifying the deductibility of the commission payment were provided to the Commissioner of Income Tax [Appeals]. The Tribunal, however, upheld the disallowance of the claim for deduction made by the Assessing Officer. The Court observed that the assessee had supplied relevant details during assessment proceedings, including bills, vouchers, and payments made through account payee cheques. The Commissioner of Income Tax [Appeals] reversed the Assessing Officer's decision, concluding that the payments were in the nature of commission.

Issue 2: Tribunal's Decision on Nature of Commission Payments:
The Tribunal focused on one transaction with a specific company and doubted the nature of services rendered by them. However, the Court found that the Tribunal did not discuss the facts already on record regarding other commission agents. The initial burden to establish payments as commission rested on the assessee, which was fulfilled with accepted records and documents. The burden then shifted to the revenue, which failed to prove that the payments were not in the nature of commission.

Issue 3: Burden of Proof on Revenue:
The Court highlighted the revenue's failure to establish that the payments made by the assessee were not commission payments. Referring to legal precedents, including the decision in ALUMINIUM CORPORATION OF INDIA LTD. V. COMMISSIONER OF INCOME TAX, the Court emphasized that the reasonableness of expenditure must be judged from a businessman's perspective. The revenue did not meet the burden of proof required in this case.

Issue 4: Consideration of Commercial Expediency and Business Nature:
The Court emphasized the importance of considering commercial expediency and the nature of business activities while determining the nature of payments. The Tribunal overlooked crucial factors such as the facilitation of procuring raw materials and securing speedy payments by the agents. The Court noted that previous and subsequent years' payments were never disallowed by the Assessing Officer, indicating the regularity and legitimacy of the commission payments.

In conclusion, the Court allowed the appeal, setting aside the Tribunal's order and restoring the decision of the Commissioner of Income Tax [Appeals]. The substantial questions of law were answered in favor of the appellant/assessee, emphasizing the importance of considering commercial expediency and business nature in determining the deductibility of commission payments.