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2018 (8) TMI 1127 - AT - Income TaxGenuineness of commission expenses - AO concluded that no such agent services were required by the Government departments and did not find any genuineness in alleged commission expenses and disallowed the same, adding it back to the income of the assessee. - CIT(A) allowed partial relief only. Held that - The alleged commission expenditure has been paid by the assessee to promote its products by way of marketing and educating the farmers for the benefits of using fertilizer and pesticides so that these farmers come to the office locations of MARKFED and MPSAIDCL which are scattered across various parts of the state of Madhya Pradesh and to buy these products. The basic purpose of making such payment is to promote the sale of these two nodal agencies which in turn will make the sale to the farmers. As the demand from the farmers increases then the MARKFED/ MPSAIDCL purchases more goods from the assessee firm. There is a corresponding increase in the sales vis- -vis the commission expenses, so much so that the turnover has increased to ₹ 6.98 crores (approx) as against ₹ 2.38 crores (approx) in the preceeding year and the fact is also worth noting that salary expenditure has not increased in the proportion of increase in sales and the credit for this increase in sales directly goes to the efforts put in by the commission agents to advertise and educate the farmers which in turn have created the demand of the products sold on consignment basis by the assessee to these two nodal agencies. Entire claim of commission expenses allowed - Decided in favor of assessee.
Issues Involved:
1. Disallowance of commission expenditure of ?27.92 lakhs. Issue-wise Detailed Analysis: 1. Disallowance of Commission Expenditure of ?27.92 Lakhs: The primary issue pertains to the disallowance of commission expenditure amounting to ?27.92 lakhs by the Assessing Officer (AO). The assessee, a partnership firm engaged in trading bio-pesticides and other agricultural inputs, had claimed commission expenses of ?58.62 lakhs in its Profit & Loss account. The AO, upon scrutiny, disallowed the entire commission expenditure, questioning its genuineness based on information from government nodal agencies which indicated that no agent services were required by them. Consequently, the AO added the disallowed amount back to the assessee's income, resulting in an assessed income of ?77,84,995. Appeal to CIT(A): The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal. The CIT(A) accepted the genuineness of the commission expenditure but deemed the claimed amount excessive. Consequently, the CIT(A) restricted the allowable commission expenditure to 4% of the turnover, providing relief of ?30.70 lakhs and sustaining the disallowance of the remaining ?27.92 lakhs. Appeal to ITAT: The assessee further appealed to the Income Tax Appellate Tribunal (ITAT), challenging the disallowance of ?27.92 lakhs. The assessee argued that the CIT(A) had acknowledged the genuineness of the expenditure and the business expediency but unjustifiably restricted the commission expenditure. The assessee emphasized that the increased sales were a result of the efforts of the commission agents and that the expenditure was incurred wholly and exclusively for business purposes. Tribunal's Findings: The ITAT examined the facts and submissions, noting that the assessee's turnover had significantly increased due to the efforts of the commission agents. The Tribunal observed that the CIT(A) had accepted the necessity of the commission expenditure but had restricted it based on the percentage of turnover in previous years, which was not a justified approach. The ITAT found that the commission expenditure was incurred for promoting sales, which resulted in a threefold increase in turnover. The Tribunal also noted that the payments were made through account payee cheques with proper documentation and TDS deductions, establishing the genuineness of the transactions. Judicial Precedents: The ITAT referred to several judicial precedents, including the decisions of ITAT Delhi in Bony Rubber Co. (P) Ltd and the jurisdictional High Court in PCIT Vs Satish Jain, which supported the assessee's claim that the AO cannot disallow genuine business expenditure based on their subjective judgment of necessity. Conclusion: The ITAT concluded that the AO was not justified in disallowing the commission expenditure of ?58.62 lakhs. The Tribunal set aside the findings of the CIT(A) and allowed the assessee's appeal, deleting the disallowance of ?27.92 lakhs. The ITAT emphasized that the expenditure was incurred wholly and exclusively for business purposes, resulting in increased sales, and the genuineness of the commission payments was established with sufficient documentary evidence. Result: The ITAT allowed the appeal of the assessee, deleting the disallowance of ?27.92 lakhs, and pronounced the order in the open court on 31.7.2018.
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