2022 (11) TMI 988 - AT - Income Tax

Allowable business expenses - commission paid by assessee to his daughter-in-law - AO invoked Section 40A(2) AND CIT(A) invoked Section 37(1) - As per AO there is no evidence on record as to the qualification of the daughter-in-law as well there is no evidence on record to the effect of actual work being done by her for the business of the assessee - HELD THAT - When Section 40A was inserted Section 37(1) was very much there in the statute, and if both are harmoniously read there is no dichotomy between both the Sections, rather at the first threshold level, the expenses which are covered by Section 37 should clear the hurdle/conditions as imposed by Section 37(1) that it should be incurred wholly and exclusively for the purposes and it should not be personal expenditure nor capital expenditure. To consider the expenses being allowable u/s 40A(2), it is precondition that all conditions as stipulated u/s 37 are met, if the expense falls u/s 37. Even before us, no evidence is filed by assessee to substantiate that she actually rendered services or did any work as Marketing Executive for the assessee s business, from 01.04.2013 to 30.09.2013. Merely stating that she included the said commission in her income-tax return is not sufficient. Further, merely because part of the expenses are allowed by authorities below(may be erroneously) will not create any vested right in favour of the assessee that the entire expenses should be allowed. The assessee has to first discharge its onus u/s 37(1) and then the burden shifts to Revenue to rebut the same with cogent/credible evidence. The assessee in the instant case , failed to discharge even its primary onus , as is required u/s 37(1) of the 1961 Act. Thus, in the absence of any evidence to the effect of actual rendering of services and work done by daughter-in-law of the assessee as Marketing Executive of the assessee s business, we are afraid the same cannot be allowed as business expenses. We are in agreement with the appellate order passed by ld. CIT(A) on this issue and decline to interfere with the same. We order accordingly. Disallowance of commission paid by assessee to middlemen of different gas agencies of different places - The authorities below partly allowed commission paid by assessee to middlemen of different gas agencies based on the past history of the earlier year. For us, to interfere with the decision of ld. CIT(A), the assessee was required to bring on record cogent/credible evidences to substantiate its claim, but no such cogent/credible evidences is filed, except ledger account wherein the entire commission is claimed to have been paid in cash to large number of persons , only on two days in the entire year, viz. 30.09.2013 and 31.03.2014, which is against preponderance of probabilities, and no reasons and justification of making payment to such a large number of persons in cash and that too only on two days in the year is explained by the assessee, with further lack of evidences as to the details and complete particular of the middlemen such as name , address, PAN etc. to whom commission is paid and with no computational details as to how these commission are worked out, make assessee case for claim of commission expenses as business expense worse, as the assessee failed to discharge its onus as is mandated u/s 37(1) that the aforesaid commission expenses were incurred wholly and exclusively for the purposes of business of assessee. Merely because part of the commission expenses were allowed by lower authorities will not create any vested right in favour of the assessee as to allowability of the entire claim of deductibility of commission expenses, unless the assessee discharges its onus as is mandated under the provisions of the 1961 Act, which in the instant case the assessee failed to discharge even its primary onus u/s 37(1) - Thus, the assessee fails on this issue also, and we decline to interfere with the appellate order passed by ld. CIT(A). We order accordingly. Decided against assessee.

Summary

Issues Involved:
1. Disallowance of commission paid to Marketing Executive (daughter-in-law of the assessee).
2. Disallowance of commission paid to middlemen at different gas agencies.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Marketing Executive (Daughter-in-law of the Assessee):

The assessee filed an appeal against the disallowance of commission paid to his daughter-in-law, Mrs. Priyanka Keshari, amounting to Rs. 3,10,289/-. The Assessing Officer (AO) observed that the commission was claimed for the first time and deemed it a colorable device to minimize tax liability. The AO allowed only Rs. 15,000/- per month and disallowed the remaining amount under Section 40A(2)(a) of the Income-tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting the lack of evidence regarding Mrs. Priyanka Keshari's qualifications and the actual work done. The Tribunal also upheld the CIT(A)'s decision, emphasizing that the primary onus is on the assessee to prove that the expenses were incurred wholly and exclusively for business purposes as per Section 37(1). The Tribunal found no evidence to substantiate the actual rendering of services by Mrs. Priyanka Keshari and thus confirmed the disallowance.

2. Disallowance of Commission Paid to Middlemen at Different Gas Agencies:

The AO disallowed Rs. 2,94,000/- out of the total commission paid to various middlemen, citing a lack of confirmation from the recipients. The CIT(A) confirmed this disallowance, noting that the turnover increased by 54.8%, but commission expenses increased by 132%, which seemed abnormally high. The Tribunal observed that the assessee failed to provide complete details of the middlemen, including names, addresses, and PANs, and did not furnish any working details of how the commission was computed. The entire commission was paid in cash on just two days, which was against the preponderance of probabilities. The Tribunal upheld the CIT(A)'s decision, stating that the assessee failed to discharge the primary onus under Section 37(1) to prove that the expenses were incurred wholly and exclusively for business purposes.

Conclusion:

The Tribunal dismissed the appeal filed by the assessee, confirming the disallowance of commission paid to both the Marketing Executive (daughter-in-law) and the middlemen at different gas agencies. The order was pronounced on 04.11.2022 at Allahabad, U.P.