2015 (6) TMI 244 - AT - Income Tax

Disallowance of commission paid - CIT(A) deleted the addition - Held that - It is evident from the statements recorded by the AO and reproduced in his order and the confirmations sent by various parties that all the parties have recognized Sh. Nawal Khanna and some of them stated that they were thinking that Sh. Nawal Khanna was an employee of the assessee-company and some were thinking he is representing the assessee-company. The middleman Sh. Nawal Khanna was not acting like independent agent has rightly been observed by the ld. CIT(A) and it is the way of doing business by the assessee to procure orders, cheques etc. It is not a case of the AO that Sh. Nawal Khanna has been paid commission only in the impugned year, as mentioned by the ld. CIT(A) in his order referred to hereinabove. Sh. Nawal Khanna has been paid commission since assessment year 2001-02 to 2007- 08 and the same has been allowed by the Income tax Department except in the impugned year. It is also not the case that only Sh. Nawal Khanna has been paid commission and nothing has been paid as commission to others, as mentioned in the order of the ld. CIT(A) referred to hereinabove i.e. to Sh. Harminder Benipal of M/s. Marlik Seam and others were paid commission and the said commission has been allowed as expenditure by the Income Tax Department is not under dispute. The said Sh. Nawal Khanna is not relevant person as provided u/s 40A(2)(b) of the Act. Further, no basis brought on record by the AO to hold that the commission so paid is bogus. It is fact on record that all the parties knew Sh. Nawal Khanna and about the services carried out by him like procurement of orders and cheques etc. In the facts and circumstances, the said commission paid to Sh. Nawal Khanna is allowable under section 37(1) of the Act. We find no infirmity in the order of the ld. CIT(A), who has rightly allowed the claim of the assessee. - Decided against revenue.

Summary

Issues:
1. Disallowance of commission paid by the assessee.
2. Recognition of Sh. Nawal Khanna as an employee or representative of the assessee.
3. Allowability of commission expenses under section 37(1) of the Income Tax Act.

Analysis:

Issue 1: Disallowance of Commission Paid
The Revenue appealed against the CIT(A)'s order deleting the addition made by the AO on account of disallowance of commission paid to Sh. Nawal Khanna. The AO contended that the commission was not wholly and exclusively for business purposes, thus not allowable under section 37(1) of the Act. The ITAT, Amritsar Bench directed the AO to issue summons to purchasers who bought through Sh. Nawal Khanna. Only one person attended, stating he directly purchased from the company's employees. Despite the AO's doubts, the CIT(A) found the commission genuine based on statements from parties recognizing Nawal Khanna as an employee/representative of the assessee.

Issue 2: Recognition of Sh. Nawal Khanna
Parties attending the summons confirmed Nawal Khanna's association with the assessee, differing in their perception of his role. The CIT(A) clarified that Nawal Khanna was not an independent agent but acted as a dependent agent procuring orders for the assessee. The commission payments to Nawal Khanna over multiple assessment years were allowed, indicating a consistent business relationship. The AO's confusion about Nawal Khanna's role was addressed by the CIT(A) through a detailed analysis of the business model and commission payments.

Issue 3: Allowability of Commission Expenses
The ITAT upheld the CIT(A)'s decision to allow the commission expenses under section 37(1) of the Act. The recognition of Nawal Khanna's services in procuring orders and checks for the assessee, along with the absence of evidence to deem the commission as bogus, supported the allowance of the claimed expenses. The ITAT dismissed the Revenue's appeal, affirming the legitimacy of the commission payments to Nawal Khanna and the correctness of the CIT(A)'s decision.

In conclusion, the judgment clarified the nature of the commission paid, the role of Nawal Khanna, and the reasoning behind allowing the commission expenses. The decision emphasized the importance of understanding the business relationships and practices while determining the allowability of expenses under the Income Tax Act.