2014 (9) TMI 498 - AT - Income Tax

Commission on purchases treated as bogus Held that - CIT(A) has examined the issue in great detail - he has made enquiry from the suppliers as well as the party to whom commission was paid by the assessee in respect of purchases - the assessee s business was mainly dependent on the supply of goods from Auchtel Products Ltd. and therefore, the assessee had to pay the amount of commission on purchases - the assessee had agreed with the terms and conditions of the company and to compulsorily part with certain amount by way of commission to the sister concern of the supplier company which in the opinion of the CIT(A) was nothing but part of the sale consideration payable by the assessee company to the supplier company thus, the order of the CIT(A) is upheld Decided against revenue. Commission paid on sales and remuneration paid to Directors disallowed Held that - No commission was paid to M/s Klassic Enterprises Prop. Subash Bhagat in AY 1999-2000 and the amount of commission paid in AY 2000-2001 was only ₹ 2,94,387/- as against current year of ₹ 10,72,720 - When the assessee company was effecting sales to these customers in AY 1999-2000 also, when no commission was paid to M/s Klassic Enterprises Prop. Subash Bhagat, it cannot be said that these parties were introduced by this commission agent to the assessee - few parties are new to whom no sales was effected in AY 1999-2000 but when in majority cases, the claim of commission payment is found bogus, in respect of these few new parties also, it cannot be said that any service was rendered by this person to the assessee company because it is not possible to say that commission is to be compulsorily paid for effecting sale to a party for the first time and therefore, commission paid to him is allowable as business expenditure in the hands of the assessee even when the assessee is not able to establish that services were rendered by the agent Decided against assessee. Although the AO has invoked the provisions of section 40A(2) of the Act but he has not established that the increase in remuneration to the directors is excessive or unreasonable. In the present case, the AO has compared the remuneration paid to these lady directors with the maximum salary paid to employees and has noted that the maximum salary given to one of the employees is ₹ 60,000/- p.a. and the salary of remaining employees is in the range of ₹ 30,000/- p.a. and he held that the salary payable to these directors can be allowed up to ₹ 50,000/- p.a. - to the third director i.e. Shri V. K. Duggal, remuneration was paid to the extent of ₹ 1,50,000/- and the same was allowed by the AO also - The AO also noted in the assessment order that a few vouchers have been signed by these lady directors also - the disallowance made by the AO out of the directors remuneration on the basis of comparison of salary paid to the employees of the assessee is not justified Decided against assessee.

Summary

Issues Involved:
1. Legitimacy of commission payments on purchases.
2. Disallowance of commission payments on sales.
3. Disallowance of remuneration paid to directors.

Detailed Analysis:

1. Legitimacy of Commission Payments on Purchases:
The Revenue challenged the legitimacy of the commission paid by the assessee to M/s Asian Chemical Product Company, arguing it was bogus. The CIT(A) examined the case in detail, noting that the assessee had a long-standing relationship with M/s Auchtel Products Ltd. and that payments to M/s Asian Chemical Product Company were part of the business arrangement. Despite close linkages between the companies, the CIT(A) concluded that the commission payments were incidental to the assessee's business and allowed the deduction of Rs. 11,41,105/-. The Tribunal upheld this decision, finding no reason to interfere as the CIT(A)'s findings were not successfully contested by the Revenue.

2. Disallowance of Commission Payments on Sales:
The assessee contested the disallowance of Rs. 10,72,720/- out of commission paid on sales. The Tribunal examined the details of sales and commission payments over three years, noting inconsistencies such as the absence of commission payments to M/s Klassic Enterprises in earlier years despite sales to the same parties. The Tribunal found the assessee's claim of commission payments to be unsubstantiated and upheld the disallowance, concluding that the payments were not justified as business expenses.

3. Disallowance of Remuneration Paid to Directors:
The assessee also contested the disallowance of Rs. 2,00,000/- out of remuneration paid to directors. The Tribunal reviewed the case, noting that the Assessing Officer had allowed only Rs. 50,000/- each for two directors based on comparisons with employee salaries. However, the Tribunal found this comparison inappropriate, noting that the directors were involved in business affairs. Citing relevant case law, the Tribunal concluded that the disallowance was not justified and deleted it.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal upheld the legitimacy of commission payments on purchases but maintained the disallowance of commission payments on sales. It also reversed the disallowance of remuneration paid to directors.