2023 (4) TMI 314 - AT - Income Tax

Addition u/s 40A - genuineness commission expenses - factum of services rendered by the distributors to the assessee for the allowability of claim of commission - as per DR no evidence of rendering any service by the agents was filed by the assessee - HELD THAT - As communication inter se between the assessee and the agents who at the cost of repetition we may point out are related to the assessee being persons specified u/s. 40A(2)(b) - There is not a single third party communication or correspondence evidencing any work done by these parties as distributors or executors of job work in the case of Parul Traders for the assessee. Even otherwise the evidences to the effect of communications with the agents regarding Obtaining C-forms or depositing cheques, does not show that these agents were acting as distributors of the assessee. The assessee has not produced a single document evidencing the distributorship work done by these agents. Not a single document evidencing work done by the distributors for procuring and enhancing sale of the assessee. Not even the statement showing the amounts of sales procured by these parties for the assessee from their respective regions, correlated with the accounts of the assessee, as mentioned in the agreements, has been filed, When as per the agreement this is an internal document which could have been easily available with the assessee. We therefore find that the evidences filed by the assessee were not sufficient to demonstrate the rendering of services by these distributors to the assessee. We therefore concur with the authorities below that the factum of any services rendered by the distributors/agents has not been established by the assessee at all, the evidences furnished by the assessee we hold are not sufficient to establish the said fact as dealt with by us. The contention of the ld. Counsel for the assessee therefore that the burden of proof shifted to the revenue does not merit consideration. Having found the evidences to be insufficient to prove the claim of the assessee, there was no need for the revenue to have made any enquiry with regards to the same and the onus rested on the assessee only to prove its claim. Principle of res judicata - Contention of the assessee that the claim having never been disallowed in the past or succeeding years, following the principle of consistency, the settled and accepted position ought not to have been distributed - The principle of res judicata does not apply to Income Tax proceedings and the facts of each year have to be considered and merely because the claim has been allowed all these years without being examined, does not make the claim legitimate despite evidences on record proving to the contrary. The case laws relied by the Ld. Counsel for the assessee in this regard, are all distinguishable on facts. Therefore, this contention of the ld. Counsel for the assessee that following the principle of consistency the claim ought to have been allowed in those years is also rejected. Disallowance in any case could not have been made u/s. 40A(2)(b) of the Act where the genuineness cannot be brought into question and only the fair market value of the transaction with specified persons can be determined and the excess paid over it be disallowed, we find merits no consideration also - A.O. has not invoked Section 40A(2)(b) for the purposes of making the disallowance. The A.O. we find has only referred to the Section for pointing out that the agents were closely related to the assessee qualifying as specified persons as per the said section and the disallowance has been made finding the claim to be ingenuine in terms of Section 37(1) of the Act. Therefore this contention of the assessee is also rejected. As for the contention of the Ld.Counsel for the assessee that the disallowance even if made would be a tax neutral exercise since the commission agents have paid taxes on the same in their hands, the same merits no consideration since the expenses have been found to be in-genuine and no shelter under the tax neutrality principle can be given to such cases of claims found to be not genuine. Thus disallowance of commission expenses upheld - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of commission expenses for lack of documentary evidence.
2. Application of Section 40A(2)(b) of the Income Tax Act.
3. Principle of consistency in allowing commission expenses.
4. Revenue neutrality of disallowance.
5. Levy of interest under Sections 234A, 234B, and 234C.
6. Initiation of penalty proceedings under Section 271(1)(c).

Summary:

1. Disallowance of Commission Expenses:
The appeals by two different assessees, belonging to the same group, contested the disallowance of commission expenses by the Assessing Officer (A.O.) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The disallowance was based on the absence of documentary evidence proving services rendered by the specified persons to whom the commission was paid. The A.O. noted that the commission was paid to closely related persons under Section 40A(2)(b) of the Income Tax Act and the assessees failed to furnish evidence of services provided.

2. Application of Section 40A(2)(b):
The A.O. referenced Section 40A(2)(b) to highlight that the agents were closely related to the assessees. However, the disallowance was made under Section 37(1) of the Act, finding the claim to be ingenuine. The contention that disallowance under Section 40A(2)(b) should only consider fair market value was rejected.

3. Principle of Consistency:
The assessees argued for the allowability of commission expenses based on the principle of consistency, citing that similar expenses were allowed in previous and subsequent years. However, it was found that the issue was not examined in those years, and where it was examined, the disallowance was made for lack of evidence. The principle of res judicata does not apply to Income Tax proceedings, and each year's facts must be considered independently.

4. Revenue Neutrality:
The assessees contended that the disallowance was revenue neutral since the commission agents paid taxes on the income. This argument was rejected as the expenses were found to be ingenuine, and no shelter under the tax neutrality principle can be provided for non-genuine claims.

5. Levy of Interest:
The assessees also contested the levy of interest under Sections 234A, 234B, and 234C of the Act. This issue was not elaborated upon in the judgment.

6. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under Section 271(1)(c) was deemed unjustified by the assessees. This issue was also not elaborated upon in the judgment.

Conclusion:
The disallowance of commission expenses amounting to Rs. 86.03 lakhs for Ravikiran Ceramic Pvt. Ltd. and Rs. 39,21,215/- for Mangalya Ceramic was upheld. Both appeals were dismissed.

Order Pronounced:
Order pronounced in the Open Court on 13-03-2023.