2019 (5) TMI 1501 - AT - Income Tax

Disallowance of expenditure on account of payment of commission - allowable business expenditure - CIT A has deleted disallowance - HELD THAT - Evidences in form of emails exchanged between customers and certain specific employees of recipient of commission in which various customers have communicated for placing purchase orders, for resolving supply and payment issues by referring to earlier meeting and communication with such persons. Such evidences were also produced before learned assessing officer however those were ignored. Assessee also submitted name of employees and supported it with copies of salary slips of various employees of recipient of commission. Further telephone number mentioned in various purchase orders were also matched with telephone number of commission recipient. CIT A referred to various evidences furnished by assessee to support that services have in fact been rendered by these parties to assessee for which payment of commission has been made. CIT A held that commission agent has contacted customers on behalf of appellant by using advertisement material etc. Such services were being provided since financial year 2007 08 and learned assessing officer has accepted these payments Payment of commission made to M/s Action Udyog CIT A noted that that these party is actually acted as a trader which purchased shoes from appellant and for which payment made to appellant by it. Such items were sold by this entity to customers at same price for which it was paid fixed profit at rate of 8% of turnover in terms of agreement dated 1/4/2009 - evidences placed by assessee for commission paid to A S Marketing have been considered by assessing officer for making disallowance with respect to payment of commission to this party. Therefore it is submitted that it is not a payment of commission to commission agent but sale of goods at fixed percentage of profit. CIT A has deleted disallowance after considering facts of case placed before him by assessee as well as reasons recorded by assessing Officer in making disallowances. Learned CIT A further made certain enquiries and based on which he deleted disallowance. Therefore we do not find any infirmity in order of learned CIT A in deleting disallowance -Decided in favour of assessee Disallowance u/s 14A - HELD THAT - Provisions of section 14 A applies as soon as assessee earns an exempt income. It is an altogether a different aspect that whether assessee has incurred any expenditure or not, which is required to be tested subsequently, but provisions of section 14 A triggers as and when assessee earns exempt income. As it is a fact that disallowance cannot exceed exempt income, therefore without going into merits of fact whether assessing officer has recorded satisfaction or not, we direct learned assessing officer to restrict disallowance u/s 14 A of income tax act to extent of INR 1 759/ only. To his proposition, AR also agreed. - Decided partly in favour of assessee in part.

Summary

Issues Involved:
1. Deletion of disallowance of commission payments to M/s A. S. Marketing and M/s Action Udyog under section 37(1) of the Income Tax Act, 1961.
2. Violation of Rule 46A(3) of Income Tax Rules, 1962, regarding additional evidence.
3. Classification of payment to M/s Action Udyog as commission or profit sharing.
4. Deletion of disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
5. Applicability of the Delhi High Court decision in the case of Holcim Pvt. Ltd.
6. Legal proposition regarding tax-exempt income becoming taxable due to erroneous payment by the assessee.

Detailed Analysis:

1. Deletion of Disallowance of Commission Payments:
The primary issue revolves around the deletion of disallowance of commission payments totaling ?1,87,75,015 to M/s A. S. Marketing and M/s Action Udyog. The Assessing Officer (AO) disallowed these expenses, questioning the genuineness of the services rendered by the agents. The AO cited the lack of acknowledgment from customers regarding the involvement of agents and inadequate confirmation of services rendered. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed these expenses based on substantial evidence provided by the assessee, including purchase orders, emails, and confirmations from commission recipients. The CIT(A) also examined the proprietor of A. S. Marketing and found credible evidence supporting the services rendered. For M/s Action Udyog, the CIT(A) noted that the payments were part of a profit-sharing agreement rather than commission, further supported by sales and purchase bills.

2. Violation of Rule 46A(3):
The AO argued that the CIT(A) relied on additional evidence without granting an opportunity for the AO to be heard, violating Rule 46A(3) of the Income Tax Rules. However, the CIT(A) conducted a thorough examination, including the oath examination of the commission recipient, and considered all relevant evidence before making a decision.

3. Classification of Payment to M/s Action Udyog:
The AO classified the payment to M/s Action Udyog as commission, while the CIT(A) held it as a profit-sharing arrangement. The CIT(A) verified the agreement and found that the payments were made based on a fixed profit percentage, supported by relevant sales and purchase bills, thus justifying the deletion of disallowance.

4. Deletion of Disallowance under Section 14A:
The AO disallowed ?7,39,792 under Section 14A read with Rule 8D, citing that the assessee had investments yielding tax-exempt income. The CIT(A) deleted this disallowance, noting that the majority of investments were in closely held family companies, and the actual exempt income earned was only ?1,579, which was erroneously reported as ?1,95,658 by the AO. The Tribunal upheld the CIT(A)'s decision, directing the AO to restrict the disallowance to the actual exempt income of ?1,579.

5. Applicability of the Delhi High Court Decision:
The AO contended that the CIT(A) erroneously relied on the Delhi High Court decision in Holcim Pvt. Ltd. However, the CIT(A) applied the principles correctly, considering the peculiar facts of the assessee's case, and the Tribunal found no infirmity in this reliance.

6. Legal Proposition on Tax-Exempt Income:
The AO challenged the CIT(A)'s proposition that tax-exempt income becomes taxable if the assessee erroneously pays tax on it. The Tribunal clarified that the provisions of Section 14A apply as soon as exempt income is earned, irrespective of whether the assessee claims it as exempt or pays tax on it. The disallowance should not exceed the exempt income earned.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of disallowance of commission payments to M/s A. S. Marketing and M/s Action Udyog, finding substantial evidence supporting the services rendered and the profit-sharing arrangement. The Tribunal also upheld the CIT(A)'s deletion of disallowance under Section 14A, restricting it to the actual exempt income earned. The appeal was partly allowed in favor of the revenue on the issue of disallowance under Section 14A, but the major disallowances were upheld in favor of the assessee.