2013 (4) TMI 342 - AT - Income Tax

Disallowance of commission payment - whether the said payments are allowable u/s. 37(1) - assessee was engaged in the business of manufacturing electrical items supplying material to Railways and BHEL - Held that - While carrying out its business, assessee-company had availed services of certain persons and made payment to them it cannot be held that expenditure incurred was not for business. Documents referred to by the assessee clearly indicate that assessee was getting orders/payments/ pieces of information from the persons payments have been made. Getting information about the material required by Indian Railways/BHEL was one of the activities of the agents and they were paid for it. Assessee is situated at Mumbai and for procuring orders, if he avails services of agents instead of opening branch offices at different places, it can easily be termed a prudent decision. One cannot forget that advertisement for procuring the orders are not always published in national news papers. When goods are required in smaller quantities, tenders are floated in local news papers only. Assessee-company can have access to such tenders through local agents only. In these circumstances, if agents have been paid commission, it has to be held an allowable expenditure. Thus payments made by the assessee to agents were not against public policy rather same were pure business transactions. Assessee did not make any payment in contravention of law of the land and hence cannot be treated as expenditure incurred against public Policy & the expenditure is allowable as business expenditure - in favour of the assessee.

Summary

Issues:
1. Disallowance of commission payment made by the appellant.
2. Allowability of the expenditure under Section 37(1) of the Income Tax Act.

Issue 1: Disallowance of Commission Payment:
The appellant, engaged in manufacturing electrical goods, filed its income tax return declaring income. During assessment, the Assessing Officer (AO) found a commission payment of Rs. 42.09 Lakhs and requested details. The AO disallowed the claim as the appellant failed to provide sufficient details, stating the payment was not for services rendered but for liaison work. The First Appellate Authority (FAA) upheld the disallowance, deeming it against public policy and as illegal gratification. The FAA referenced case law to support the decision. However, the appellant argued that the payments were for legitimate business purposes, supported by documents showing services provided by agents in procuring orders from Indian Railways and BHEL. The Tribunal noted that the payments were for business activities, not against public policy, and allowed the appeal.

Issue 2: Allowability of Expenditure under Section 37(1):
The Tribunal analyzed whether the commission payments were allowable under Section 37(1) of the Act. It emphasized that expenses must be incurred wholly and exclusively for business purposes, without any ulterior motives. The Tribunal reviewed the documents provided by the appellant, indicating the agents' role in procuring orders and facilitating business transactions. The Tribunal distinguished the case from precedents involving public policy violations, monopoly creation, and illegal activities. It concluded that the appellant's payments to agents were legitimate business transactions, not against public policy, and thus allowable as business expenditure under Section 37(1). The Tribunal ruled in favor of the appellant, allowing the appeal and approving the expenditure of Rs. 42.09 Lakhs.

In summary, the judgment addressed the disallowance of commission payment and the allowability of expenditure under Section 37(1) of the Income Tax Act. The Tribunal found that the appellant's payments to agents were for legitimate business purposes, not against public policy, and therefore allowable as business expenditure. The appeal was allowed, overturning the previous decisions and supporting the appellant's position.