2012 (11) TMI 160 - AT - Income Tax

In genuine commission payment - Held that - The two ingredients that the payment was made on contractual basis and the arrangement was found to be & bona fide one are yet to be established in this case - the final conclusion of the AO was not based upon this provision rather the impugned disallowance was based upon the provisions of section 37(1). From the side of the assessee, few case laws have also been cited for the legal proposition that in a case where there is no saving of tax, then the transaction should not be disallowed - an individual has certain standard deductions, specially a lady and also avail the benefit of the limit of non-taxable income along with statutory deductions prescribed in the statute for an individual. Therefore, case laws as cited by assessee is applicable when all these factors are also taken into account to consider the argument of Revenue Neutral , therefore to conclude that the CIT(A)/AO has not examined some of the basic reasons for disallowance it proper to restore this issue back to the file of AO to arrive at the correct judicial decision - in favour of assessee for statistical purposes. Disallowance of rent on DG set - high lease-rent being paid by the assessee-company to an interested party - Held that - If an expenditure is not wholly for the purpose of the business, but partly for the purpose of the business, then only that part is allowable. The words wholly and exclusively , thus refer to the motive and the object behind the expenditure. The object has to be exclusively as also solely for running of the business - AO has decided the percentage of disallowance on the basis of the expected annual return on such investment no circumstance the disallowance as made by the AO should be enhanced while we are restoring this ground back to the stage of the AO with the direction that the assessee shall place on record the basic requirement of business necessity for taking on hire the impugned DG set - in favour of assessee for statistical purposes. Disallowance of miscellaneous expenses - Held that - As an amount of Rs.10,352/- could not be explained by the assessee even at the appellate stage, thus upto that extent, the addition was confirmed - against assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 24,71,078/- being commission paid to Roopam Mardia.
2. Deletion of disallowance of rent on DG set amounting to Rs. 18,00,000/-.
3. Deletion of disallowance of Rs. 5,00,000/- made out of miscellaneous expenses.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of Rs. 24,71,078/- Being Commission Paid to Roopam Mardia:
The assessee company, engaged in manufacturing steel and iron items, was scrutinized for paying a commission to Smt. Roopam Mardia, who held 18.20% shares in the company. The AO found no evidence of services rendered by Roopam Mardia or her employees, and noted that the sales were conducted directly by the company's directors and employees. The commission was paid without monthly statements or reference to sales made by Roopam Mardia, and the rate of commission was higher than that paid to other parties. The AO disallowed the commission payment under section 37 of the IT Act.

Before the CIT(A), the assessee argued that the commission was paid under an agreement and was justified by the increase in turnover. The CIT(A) accepted the assessee's contentions and deleted the disallowance, relying on the decision in ACIT v. Associated Strips (P) Ltd.

The Tribunal noted that the assessee must establish the genuineness of the commission payment with concrete evidence of services rendered. The Tribunal found that the AO had rightly invoked section 37 when the genuineness of the commission could not be conclusively established. The Tribunal restored the issue back to the AO for a fresh decision, directing the assessee to provide necessary evidence.

2. Deletion of Disallowance of Rent on DG Set Amounting to Rs. 18,00,000/-:
The AO questioned the lease-rent paid to Smt. Roopam for a diesel generator, suspecting it was an undue benefit. The generator, purchased for Rs. 96 lakhs, was rented out at Rs. 3 lakhs per month. The AO disallowed 50% of the rent, invoking section 37, as the expenditure was not wholly for business purposes.

The Tribunal noted that the assessee must demonstrate the business necessity for hiring the generator set, such as evidence of frequent electricity failures. The Tribunal restored the issue back to the AO, directing the assessee to provide evidence of the business need for the generator set. The Tribunal clarified that the disallowance should not be enhanced upon re-examination.

3. Deletion of Disallowance of Rs. 5,00,000 Made Out of Miscellaneous Expenses:
During a survey, certain loose papers indicated unrecorded transportation bills and discrepancies in stock summary. The AO added a lump sum of Rs. 5 lakhs to cover these discrepancies. The CIT(A) confirmed the addition of Rs. 10,352/- based on unexplained entries but deleted the rest.

The Tribunal upheld the CIT(A)'s decision, finding no fallacy in the partial confirmation and deletion of the disallowance.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, restoring the issues of commission payment and generator rent back to the AO for fresh examination, while upholding the CIT(A)'s decision on miscellaneous expenses.