2023 (6) TMI 170 - AT - Income Tax

Disallowance of commission expenses - AO observed that the payments under the head commission made to various persons engaged in marketing and distribution network and therefore estimated that the minimum rate of 2% on total sales claimed by the assessee - HELD THAT - Above commission payment are made by the assessee by cheques and appropriate TDS is deducted and remitted to the Government account and the parties also assessed to Income Tax. The assessee is also maintaining its books of accounts in ERP system, Commission is calculated at the end of the relevant quarter and after due verification of sales target achieved, payment received against sales etc, and on the basis of debit note received from dealers, the commission expenses is accounted in the books of the assessee company. AO also found that similar commission expenses is being accepted by the department and which is not disputed by the A.O. Thus CIT(A) deleted the addition correctly - Decided against revenue. Disallowance of Gratuity paid towards LIC fund which was not approved by Income Tax Authority - CIT-A allowed the claim of assessee - HELD THAT - This issue is been settled in the case of Valsad District Central Co-Op. Bank Ltd. 2019 (5) TMI 1979 - ITAT SURAT as held petitioner produced what it had been producing all along namely, the contribution made towards the fund and the agreement of the LIC to manage the fund. If the Assessing Officer had any doubt about such a claim, it was always open for him to examine it, ask the petitioner to fulfill further requirements. Merely because the petitioner did not provide an additional declaration in the return that the scheme though approved, the pentioner is unable to produce a copy of the order approved by the Commissioner after long gap of time, cannot be categorized as failure on the part of the petitioner to disclose truly and fully all material facts. Also in M/S. TAMILNADU MARITIME BOARD 2020 (10) TMI 798 - MADRAS HIGH COURT held that contribution made towards fund was to be treated as business expenditure and the same was allowable u/s. 37(1) of the Act, even though the said fund was unapproved by Income Tax Department - no hesitation in confirming the deletion made by the Ld. CIT(A) - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Disallowance of gratuity payment to an unapproved fund.

Summary:

Issue 1: Disallowance of Commission Expenses
The Revenue appealed against the deletion of an addition of Rs. 2,00,53,739/- made by the Assessing Officer (AO), who had restricted commission expenses to 2% of total sales. The AO contended that the assessee could not substantiate the commission expenses with documentary evidence, which varied on a case-to-case basis.

The assessee argued that the commission rates were pre-determined and varied based on several factors such as order price, profit margin, and future business prospects. The payments were made by cheque, TDS was deducted, and all recipients were assessed to income tax. The books of accounts were maintained in an ERP system, and commissions were accounted for based on debit notes received from dealers.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the commission expenses were consistently allowed in previous years, and the payments were made to unrelated parties with proper documentation and TDS compliance. The CIT(A) found that the AO's comparison of commission expenses to net profit was not a valid basis for disallowance.

The Tribunal upheld the CIT(A)'s decision, confirming the deletion of the addition made by the AO, as the Revenue could not provide any contrary evidence.

Issue 2: Disallowance of Gratuity Payment
The Revenue also appealed against the deletion of an addition of Rs. 5,27,881/- made by the AO on account of gratuity payments to an unapproved fund. The assessee contended that the payment was made to the Life Insurance Corporation (LIC), an alternative authority for gratuity payments, and cited various judicial decisions supporting the claim.

The CIT(A) relied on the Gujarat High Court decision in Valsad District Central Co-Op. Bank Ltd. v. ACIT and the Madras High Court decision in CIT v. Tamilnadu Maritime Board, which held that contributions to unapproved funds could be treated as business expenditure under Section 37(1) of the Income Tax Act.

The Tribunal affirmed the CIT(A)'s decision, rejecting the Revenue's appeal and confirming that the gratuity payment was allowable as business expenditure.

Conclusion:
The appeal filed by the Revenue was dismissed, and the Tribunal upheld the CIT(A)'s deletion of both the additions made by the AO regarding commission expenses and gratuity payment. The order was pronounced in the open court on 26-05-2023.