1989 (1) TMI 157 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 3,69,824 commission paid to M/s. Niki Tasha (India) Pvt. Ltd.
2. Commercial expediency of the commission payment.
3. Relationship between the parties involved.
4. Evidence supporting the commission payment.
5. Previous similar transactions and their treatment.

Detailed Analysis:

1. Disallowance of Rs. 3,69,824 Commission Paid to M/s. Niki Tasha (India) Pvt. Ltd.
The assessee's appeal was directed against the order of the CIT(A) confirming the disallowance of Rs. 3,69,824 paid as commission to M/s. Niki Tasha (India) Pvt. Ltd. The Income-tax Officer (ITO) had added back this amount in the assessment, which was upheld by the CIT(A). The primary issue for determination was whether this commission payment was justified and allowable as a business expense.

2. Commercial Expediency of the Commission Payment
The CIT(A) upheld the ITO's disallowance on the grounds that no business expediency was involved in making the commission payments. The CIT(A) referred to a similar payment made in the assessment year 1979-80 to Mrs. Ritu Nanda, which was also held inadmissible. The assessee argued that the payment was made on the basis of commercial expediency, as M/s. Niki Tasha had rendered services in obtaining and facilitating contracts with the Iranian Government.

3. Relationship Between the Parties Involved
The assessee admitted that M/s. Niki Tasha (India) Pvt. Ltd. was a closely held company with shareholders closely related to those in the assessee company. The ITO and the CIT(A) viewed this close relationship as a factor contributing to the disallowance, suggesting that the payment was made for extra-commercial considerations.

4. Evidence Supporting the Commission Payment
The assessee presented various documents, including a resolution dated 12-10-1978 and an agreement dated 19-7-1978, to support the commission payment. However, the ITO and the CIT(A) found these documents insufficient to prove that M/s. Niki Tasha had rendered any services justifying the commission. The Tribunal noted that the documents were not contemporaneous and lacked verifiable evidence directly connecting the services rendered to the commission payment.

5. Previous Similar Transactions and Their Treatment
The Tribunal referred to a previous case involving a commission payment to Mrs. Ritu Nanda in the assessment year 1979-80. The Tribunal had found that Mrs. Ritu Nanda, a director of the assessee company, had not rendered any significant services justifying the commission payment. This precedent influenced the Tribunal's decision in the current case, as the facts were deemed to be on a similar footing.

Conclusion:
The Tribunal concluded that there was no evidence to support the claim that M/s. Niki Tasha (India) Pvt. Ltd. had rendered services justifying the commission payment. The close relationship between the shareholders of both companies suggested that the payment was made for extra-commercial considerations. The Tribunal upheld the disallowance of the commission payment, dismissing the assessee's appeal. The appeal was dismissed on the grounds that the payment was not made exclusively and wholly for the purpose of the assessee's business, and the manner and method of the ITO's disallowance were justified in the absence of any concrete evidence.