2017 (11) TMI 1286 - AT - Income Tax

Disallowance of commission - CIT-A deleted addition for the reason that the assessee itself had voluntarily offered the disallowance of commission in the return of income as well as admitted during the course of survey under section 133A - Held that - AO himself allowed the payment of commission @ 5% by the assessee to Hitesh Trading company and accepted the genuineness of payment & services rendered and this has been consistently allowed earlier years also. Only disallowance made is qua excess of 5% i.e. claimed by the assessee @ 8%. We find that RBI specifically approved the 8% of the commission payment. This was with a view to expand business further, as the assessee desired to do penetration in other emerging markets and accordingly, a fresh agreement was entered with Hitesh Trading Co., with expanded scope of services to be rendered. Unlike the earlier agreement, where the scope of the services by the said company was confined to USA and Canada, the scope was increased tremendously in this new agreement so as to cover entire Europe, Australia, Middle East, Asia, Hongkong and Singapore. Apart from the increase in the area of coverage, another additional duty cast was to source right quality of diamonds at competitive price as per the requirement. Since, there was a considerable expansion of the scope, the activities and the responsibilities on the part of the said company the rate of commission was enhanced from 5% to 8%. Hence, we find no infirmity in the claim of commission @ 8% and we allow the same. The orders of the CIT(A) is confirmed and appeal of the Revenue is dismissed

Issues Involved:

1. Deletion of disallowance of commission of ?1.90 crores by CIT(A).
2. Applicability of Section 195 and Section 40(a)(i) of the Income Tax Act, 1961.
3. Admissibility and impact of the assessee's voluntary admission during the survey under Section 133A.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Commission of ?1.90 Crores by CIT(A):

The primary issue addressed in this judgment is the deletion of the disallowance of ?1.90 crores of commission by the CIT(A), which the Assessing Officer (AO) had added back to the income of the assessee. The AO's disallowance was based on the assessee's voluntary admission during a survey under Section 133A that the commission paid to Hitesh Trading Company was excessive. The assessee had initially offered this amount as additional income in the revised returns filed on 13-02-2006 and 31-03-2007. However, during the assessment proceedings, the assessee retracted this offer, stating that the admission was made under a mistaken belief of facts and law.

The CIT(A) considered the remand report and submissions from both sides, noting that the permission from the Reserve Bank of India (RBI) for the increased commission rate of 8% was received on 24-01-2006, post the survey date. The CIT(A) observed that the assessee was in a confused state of mind during the survey due to the pending RBI approval and thus agreed to the surrender. The CIT(A) concluded that the commission payment was genuine and allowable, as the RBI had subsequently approved the 8% rate, and the assessee had a legitimate business relationship with Hitesh Trading Company.

2. Applicability of Section 195 and Section 40(a)(i) of the Income Tax Act, 1961:

The Revenue argued that the CIT(A) failed to examine the applicability of Sections 195 and 40(a)(i) of the Act. Section 195 pertains to the deduction of tax at source for payments made to non-residents, and Section 40(a)(i) disallows certain expenses if tax is not deducted at source. The CIT(A) did not specifically address these sections in the order. However, the Tribunal observed that the payment was made through authorized dealers and banks with RBI approval, indicating compliance with relevant regulations. The Tribunal found no infirmity in the CIT(A)'s order, implicitly suggesting that the provisions of Sections 195 and 40(a)(i) were not violated.

3. Admissibility and Impact of the Assessee's Voluntary Admission During the Survey Under Section 133A:

The Revenue contended that the assessee's voluntary admission during the survey and subsequent inclusion of the ?1.90 crores in the revised returns should be binding. The Tribunal noted that the director of the assessee had provided a detailed explanation justifying the increased commission rate during the survey. The director's statement indicated that the admission was made due to the pending RBI approval, which was later granted. The Tribunal emphasized that the admission was regarding the excessiveness of the payment, not its genuineness or admissibility. Given the RBI's approval and the expanded scope of services under the new agreement with Hitesh Trading Company, the Tribunal upheld the CIT(A)'s decision to allow the commission payment at 8%.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order to delete the disallowance of ?1.90 crores. The Tribunal found that the commission payment was genuine, supported by RBI approval, and justified by the expanded scope of services. The Tribunal also implicitly addressed the applicability of Sections 195 and 40(a)(i), indicating compliance with relevant regulations. The assessee's voluntary admission during the survey was deemed to be made under a mistaken belief, and the subsequent retraction was accepted. The appeal of the Revenue was dismissed, and the CIT(A)'s order was upheld.

← Previous Next →