2019 (9) TMI 767 - AT - Income Tax

Commission paid to HUF - meaning and import of the term agent - CIT-A deleted the addition - HELD THAT - Issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case for the assessment year 2010-11 as held that AO has not correctly understood the meaning and import of the term agent . It is not necessary that an agent receiving Commission payments has to always be a physical go-between between the principal (the Appellant in the instant case) and his/her/its customers being buyers. An agent can carry out the business of prospecting for client-buyers which would mean that many of the intended targets may not transform into buyers or may decide to purchase the items directly from the principal instead of through the agent or even without informing the agent. An advertising agent likewise has only a generic target segment and no customers can be asked of such agent to be specifically identified. A procurement agent on the contrary may have a set of sellers from whom he/she routinely contracts for purchases. AO has not been able to show that the payments have not been made to the purported agents and that these payments are not relatable to the carrying out the business and for other business purposes. The AO has merely leaped to conclusions (in the cases of Categories II III and IV) that the seeming absence of buyers (as ostensibly evidenced by letters addressed to them returning unserved) or the negations or disavowals by such buyers of any knowledge or nexus with the agents or the inability of the Commission agents to list the actual buyers would automatically disentitle the agents of their status and rights to receive Commission payments. In the scheme set in place by the Appellant the buyers directly transacted with her; the agents did not enroll them and therefore in most cases would not know them AO s action in disallowing the impugned expenses have been made on extremely thin and specious grounds that the buyers were not found or did not respond or disclaimed any knowledge of the agents or that the agents were not able to remember the buyers or were not able to furnish detailed particulars about them or for the reason that the Commission agents were HUFs. All of them are reasons that do not show any clear understanding about the reasons for and the manner in which the agents have been employed and engaged by the Appellant. - Decided against revenue

Summary

Issues Involved:
1. Justification of CIT(A) in deleting additions made by the Assessing Officer (AO) totaling Rs. 2,00,45,153/-.
2. Verification of commission payments and sundry creditors.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Deleting Additions:
The revenue appealed against the order of CIT(A), who had deleted additions totaling Rs. 2,00,45,153/- comprising (a) commission paid to HUF of Rs. 90,86,236/-, (b) unverifiable commission payment of Rs. 73,65,427/-, and (c) unverified sundry creditors of Rs. 35,93,490/-. The AO had initially disallowed these expenses during the assessment proceedings, questioning the genuineness of the commission payments and sundry creditors. However, CIT(A) found that a similar disallowance made for the assessment year 2010-2011 had been deleted by CIT(A)-2, Bhubaneswar, and thus, deleted the addition made by the AO.

2. Verification of Commission Payments and Sundry Creditors:
During the assessment proceedings, the AO noticed that the assessee had debited Rs. 3,69,40,714/- to the profit and loss account as commission paid for sales. The AO sent notices under section 133(6) of the Act to the persons who arranged the buyers for the sale of iron ore. The assessee responded that the payments were made by the assessee and the buyers had nothing to do with it, arguing that no disallowance should be made. However, the AO was not satisfied and disallowed the expenses, adding them to the total income of the assessee.

On appeal, the CIT(A) found that the AO had not correctly understood the role and definition of an agent. The CIT(A) observed that an agent might not always act as a physical intermediary between the principal and buyers, and that the agent's role could vary based on the nature of the business and the agreement with the principal. The CIT(A) also noted that the AO had not provided any evidence to suggest that the transactions and payments were not genuine. The AO's decision was based on presumptions and lacked thorough investigation.

The Tribunal upheld the findings of CIT(A), noting that the AO had not shown that the payments were not made to the purported agents or that these payments were unrelated to the business. The Tribunal also referenced the decision of the Hon’ble Supreme Court in the case of S.A. Builders Limited vs CIT, which emphasized that the revenue authorities should consider the perspective of a prudent businessman when evaluating the reasonableness of business expenditures.

The Tribunal confirmed that the CIT(A) had correctly deleted the disallowance of Rs. 3,29,17,011/- for the assessment year 2010-2011 and found no specific error in CIT(A)'s findings for the current assessment year. The Tribunal noted that the revenue could not provide any material evidence to show that the commission payments were not genuine or that the money paid through banking channels came back to the assessee. Thus, the Tribunal dismissed the revenue's appeal.

Conclusion:
The appeal of the revenue was dismissed, and the order of CIT(A) was upheld, confirming the deletion of the additions made by the AO. The Tribunal found no specific defect in the CIT(A)'s order and emphasized the importance of considering the business context and the genuineness of transactions when evaluating commission payments and sundry creditors. The Tribunal's decision was based on the precedent set in the assessee's own case for the previous assessment year.