2017 (3) TMI 395 - HC - Income Tax

Allowable expenditure under section 37(1) - commission payment - ITAT disallowed claim - Held that - We may observe that in view what has been held in the case of DCIT Vs. Super Tannery (India) Ltd. (2004 (8) TMI 43 - ALLAHABAD High Court) it cannot be said that such an expenditure if found to have been actually incurred is not allowable. The finding of the Tribunal to the contrary is clearly unsustainable. Tribunal also appears to have chosen to read certain parts of the statement given by the Sheikh Safat Ahmad in isolation and not in entirety of the facts and circumstances of the case. In so far as the finding of such payment having been made for the business purposes or it is genuine we find that the Tribunal has not considered the entire material in light of the particular facts of the case but has got swayed by certain inconsistencies and deficiencies noted by making a microscopic examination of the statement of Sheikh Shafat Ahmad as if it (Tribunal) were examining the case of that person whereas in the instant appeal it was only required to see if the expenditure claimed to have been borne by the assessee was genuine. If the answer on this issue were in favour of the assessee, then it would be of little consequence (in these proceedings) how Sheikh Shafat Ahmad has dealt with the money received by him from the assessee. We set aside and the matter is remitted to the Tribunal to decide the appeal afresh after affording opportunity of hearing to the parties.

Summary

Issues involved:
1. Allowability of commission payment under section 37(1) of the Income Tax Act for services rendered.

Analysis:
The case involved an income tax appeal filed by the assessee against the order of the Income Tax Appellate Tribunal for the assessment year 2005-06. The primary issue was whether the commission paid to a service provider for rendering services was an allowable expenditure under section 37(1) of the Income Tax Act. The assessee, engaged in the business of manufacturing firefighting vehicles, claimed a business expenditure of a specific amount towards commission paid to a service provider. The Assessing Officer disallowed the claim based on lack of evidence and a letter from the Director General of Fire and Emergency Services stating that the service provider did not attend on behalf of the assessee. The CIT(Appeals) allowed the appeal, stating there was no evidence to prove that the service provider had not rendered any services. However, the Tribunal reversed this decision, upholding the disallowance made by the Assessing Officer.

In the appeal before the High Court, it was observed that the Tribunal's decision was influenced by the service provider's failure to produce documentary evidence during the remand report stage. The Tribunal held that the burden of proof to establish the expenditure for business purposes was not met by the assessee. The Tribunal reasoned that the commission was not allowable as the assessee could only claim such expenditure if incurred on an agent of commensurate capacity, and recovery of sale consideration was not doubtful in this case. The High Court, however, disagreed with the Tribunal's reasoning, citing precedents that support the allowance of such expenditures for commercial expediency. The Court found that there was sufficient evidence on record to reach a final decision on the issue.

The High Court criticized the Tribunal for not considering the evidence on record and basing its findings on personal notions rather than factual evidence. The Court emphasized the need to establish whether the expenditure was genuinely incurred for business purposes under Section 37(1) of the Income Tax Act. The Court highlighted the importance of examining material evidence, including agreements, banking transactions, TDS deductions, and the service provider's tax assessment. The Court noted that the Tribunal failed to consider the entirety of the material and got swayed by inconsistencies and deficiencies in the service provider's statement.

In conclusion, the High Court set aside the Tribunal's order as unsustainable and remitted the matter back to the Tribunal for a fresh decision after affording an opportunity of hearing to the parties. The Court directed the Tribunal to decide the appeal within six months and emphasized the need to consider all evidence before reaching a decision on the allowability of the commission claimed by the assessee.