2017 (2) TMI 336 - HC - Income Tax

Revision u/s 263 - issue of paying of commission to the sales agency was not examined earlier by the Assessing Officer - Held that - Tribunal came to conclusion that assessee was in no way in control of the selling agent. Further the tribunal also examined the documents relating to the approval granted by the Government of India, Ministry of Law, Justice & Company Affairs issued under Section 294 AA of the Companies Act, as this approval was required to be taken by the companies, which had to be taken paid up capital of more than ₹ 50 lakhs. This too reflected the genuineness of the commission which was granted by the assessee, who is selling agent. It is on the basis of above material that the tribunal has come to conclusion that the learned CIT had made an error in revising the order under Section 263 of the Income Tax Act, as the material on record did not reflect in any manner that any activity of the assessee had resulted in causing prejudice to the revenue, nor were there any circumstances to contemplate the taking of any action under Section 263 of the Income Tax Act by the department. The tribunal, therefore, came to conclusion that the commission paid to the selling agent was based on sound and genuine business consideration and therefore, the allowances have rightly been allowed by the A.O. The disallowance made by the CIT was therefore, deleted by the Tribunal. Having heard the counsel for the both the sides and after examining the law on this issue, we are of the opinion that in the facts and circumstances of this case it is abundantly clear that the provisions of Section 263 of the Income Tax Act were not attracted in the present case for reasons that no income had escaped taxation and no prejudice or loss had been caused to the revenue. - Decided in favour of assessee

Summary

Issues involved:
1. Interpretation of Section 263 of the Income Tax Act, 1961.
2. Allowability of commission expenses to a sister concern.
3. Examination of agency agreement responsibilities.
4. Consideration of government approval under Section 294 AA of the Companies Act.

Detailed Analysis:
1. The primary issue in this case is the interpretation of Section 263 of the Income Tax Act, 1961. The department filed an appeal against the tribunal's decision to cancel an order under Section 263. The question was whether the tribunal was justified in canceling the order despite the Assessing Officer not examining the issue of paying commission to the sales agency earlier.

2. The second issue pertains to the allowability of commission expenses to a sister concern. The Assessing Officer had accepted the returned income of the assessee, which included various expenses such as commission to the sister concern. The Commissioner of Income Tax (CIT) issued a show cause notice under Section 263, alleging that the commission was allowed without proper verification and had led to tax evasion. The tribunal examined the matter and concluded that the commission was based on genuine business considerations, leading to the deletion of the disallowance made by the CIT.

3. Another significant issue was the examination of the responsibilities outlined in the agency agreement between the assessee and the selling agent. The tribunal reviewed the agent's duties, including convincing customers, collecting payments, providing technical assistance, and offering after-sales services. It was noted that the assessee was not in control of the selling agent based on these responsibilities, further supporting the genuineness of the commission payments.

4. The final issue involved the consideration of government approval under Section 294 AA of the Companies Act. The tribunal examined the approval granted by the Government of India, which reflected the genuineness of the commission payments made by the assessee to the selling agent. This approval, required for companies with a paid-up capital exceeding a certain threshold, contributed to the tribunal's decision to uphold the allowability of the commission expenses.

In conclusion, the High Court dismissed the appeal, ruling in favor of the assessee and against the department. The court found that the provisions of Section 263 were not attracted in this case as no income had escaped taxation, and no prejudice or loss had been caused to the revenue. The detailed examination of the facts, including the agency agreement responsibilities and government approval, supported the genuineness of the commission expenses, leading to the tribunal's decision to delete the CIT's disallowance.