1995 (3) TMI 185 - AT - Income Tax

Summary

Issues:
1. Disallowance of del credere commission paid to M/s Antler Corporation.
2. Determination of whether the agency arrangement was a sham transaction.
3. Reasonableness of the commission payment under section 40A(2) of the Income-tax Act.
4. Justification for the payment of commission as a legitimate business expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of del credere commission paid to M/s Antler Corporation:
The Assessing Officer (AO) disallowed part of the del credere commission paid to M/s Antler Corporation, reducing it from 0.6% to 0.4% of the sales, deeming the original amount excessive. The AO noted that the assessee's doubtful debts were minimal and the sales were primarily to government and reputed agencies, which minimized the risk of bad debts. Consequently, the AO concluded that the commission was not justified to cover potential losses from doubtful debts.

2. Determination of whether the agency arrangement was a sham transaction:
The CIT(A) considered the entire transaction of appointing M/s Antler Corporation as a del credere agent and the payment of commission as a sham. The CIT(A) argued that no services were rendered by M/s Antler Corporation to justify the commission, and thus, the payment was unreasonable under section 40A(2). The CIT(A) directed the disallowance of the entire commission amount, enhancing the assessment.

3. Reasonableness of the commission payment under section 40A(2) of the Income-tax Act:
The assessee contended that the commission was a legitimate business expenditure for ensuring the recovery of sales dues and mitigating bad debt risks. The assessee argued that the business needs should be judged from a businessman's perspective, not the revenue officer's. However, the CIT(A) concluded that the agency arrangement was a sham, and the commission payment was unreasonable. The Tribunal agreed with the CIT(A) that the payment was made for extra commercial considerations and not for genuine business purposes.

4. Justification for the payment of commission as a legitimate business expenditure:
The Tribunal examined the arguments and evidence presented. It noted that the sales were mainly to government and reputed agencies, with no significant bad debts over the years. The Tribunal found no evidence that M/s Antler Corporation made any efforts to recover doubtful debts. The Tribunal also noted the close relationship between the partners of M/s Antler Corporation and the directors of the assessee-company, suggesting that the arrangement lacked genuine business necessity. The Tribunal concluded that the payment of commission was not justified as a legitimate business expenditure and upheld the CIT(A)'s decision to disallow the entire commission.

Conclusion:
The Tribunal dismissed the appeal, agreeing with the CIT(A) that the agency arrangement was a sham transaction and the commission payment was unreasonable and made for extra commercial considerations. The entire commission payment was disallowed under sections 37 and 40A(2) of the Income-tax Act.