Presumption that commission cannot be paid for purchase wrong – ITAT

Presumption that commission cannot be paid for purchase wrong. No evidence that commission came back to assessee or agents were related parties – ITAT

ABCAUS Case Law Citation:
ABCAUS 2533 (2018) 09 ITAT

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax Vs Inbuilt Merchants Pvt Ltd
Alba Hydronics Pvt Ltd.
Printer House 188 ITR Taxman 70
Ambica Forging

The assessee had challenged the order of CIT(A) in confirming the addition made by the Assessing Officer (AO) on account of commission / service charges u/s 37(1) of the Income Tax Act, 1961 (the Act).

The AO found that the sale was made to only three parties, two domestic and one overseas. Among the various expenses incurred and claimed the assessee had claimed a deduction in the profit & loss accounts towards commission.

The assessee was issued notice u/s 142(1) to furnish inter alia the names and complete postal addresses of the agents / brokers to whom commission paid, purpose of paying such commission details of deduction and deposit of TDS on commission.

In response to the notice, the assessee furnished the list of five parties to whom commission had been paid.

The AO observed that the assessee could not establish that the commission claimed to have been paid to four parties were wholly and exclusively expensed for the purpose of business as the explanation provided by him were not justified and without any supporting evidence. The AO, in order to verify the commission from the end of the respective agents, issued summons u/s 133(6) of the Act to all the four parties to furnish certain details.

The assessee submitted that he had paid commission to two parties for arranging exporters to undertake the balance export obligation which resulted in transfer of Letter of Credit (LC) to those exporters also, and commission was paid to three parties for arranging purchase.

After detailed enquiry and considering the Inspector’s report / enquiry and assessee’s inability to furnish the necessary details and documents the AO came to the conclusion that the payment of commission to the five parties as claimed by the assessee was false, concocted and an arrangement of mutual understanding of providing adjustment entries by one party to another party.

According to AO, it was extremely unusual that a businessman will employ agent to purchase goods. AO was of the opinion that commission is generally paid to obtain sell orders or for providing other facilities.

According to the AO, the circumstantial evidences clearly indicated that such payments were in no way expended exclusively and wholly for the purpose of business which is the basic condition for eligibility of an expense as deduction u/s 37(1) of the Act. Hence, the commission paid to the above five parties was disallowed for not satisfying the conditions laid down in section 37(1) of the Act and added back to total income .

Aggrieved, the assessee preferred an appeal before the CIT(A), who upheld the action of the AO.

Aggrieved, the assessee was before the Tribunal.

The assessee explained that he was exporting goods and the foreign buyer accepted only the finest quality . In India the finest quality was mainly available in the State where the assessee had no office. Therefore, the assessee engaged and took the services of the two agents for the purpose of purchasing the finest quality of cotton.

The Tribunal noted that the export of cotton was made from the purchase thus made through the agents and payments were made by account payee cheques and TDS was duly deducted.

Presumption that commission cannot be paid for purchase wrong

The Tribunal stated that the AO’s observation that commission is not paid for effecting purchase could not be accepted as such. It was pointed out that it is common knowledge that commission is demanded by agents for purchase of flats and even for real estate transactions, commission is prevalent for commodity purchase in the commodity exchange, for stock exchange broker for purchase of shares and securities and for purchase of foreign currency and also for facilitating purchase of air/railway tickets for tour and travel.

The Tribunal opined that all evidences of purchases were submitted including copy of bills, transport details and export of such goods. The bills of the parties did contain their VAT No. as well as telephone numbers of those parties and therefore the commission payment made through bank after TDS to two parties for arranging purchase of the export quality goods from other States was a business expense and needed to be allowed as ‘deduction’ since it was of revenue nature and expended wholly and exclusively for the purpose of business.

The Tribunal further observed that commission was claimed to have been paid to two agents for their service in arranging exporters to undertake assessee’s export obligation which assessee could not himself fulfill which occasioned transfer of LC in those exporters name too.

Observing the chain of events, the Tribunal opined that the AO misunderstood the fact as if the commission was paid for transfer of LC and that LC cannot be transferred whereas it was transfer of the export order along with the transfer of LC. it was a transfer of the surplus order for export along with the LC to be used by them.

Moreover the Tribunal noted that on this transfer of surplus export order, the assessee earned profit which was duly credited in PL Account under the head service charge on export order. Therefore, the service of the agent in the aforesaid facts and circumstances were for business purpose and therefore, the commission paid was a business expense and needed to be allowed as ‘deduction’ being revenue in nature and expended wholly and exclusively for the purpose of business.

Regarding the remaining one commission agent, for purchase of Scrap, the Tribunal  observed that from the AO had issued notice U/s 133(6) to the seller company who also replied to the notice. The AO however doubted the reply on the ground it was a reputed company so the logo in the letter-head should have been in different colors etc which action of AO could not be countenanced.

The Tribunal observed that the AO had disallowed the commission simply on surmises without bringing any evidence on record to the contrary. The presumption that the seller companies building was in dilapidated condition etc or that the telephone made by the AO was not picked up by the its employee cannot be a ground for disallowing the commission.

No evidence that commission came back to assessee or agents were related parties

Furthermore, the Tribunal noted that the parties to whom commission was paid were not relatives of the assessee. There was no evidence that the commission paid had come back to the assessee.

And all the five agents had duly included the income in their return of income and paid taxes thereon and that there was no evidence to show that the money has come back to assessee or the agents were related parties.

Therefore, the Tribunal held that the service rendered by the agents were for business purpose and therefore, the commission paid was a business expense and allowed the deduction since it was of revenue nature and expended wholly and exclusively for the purpose of business.

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