2020 (2) TMI 252 - AT - Income Tax

Disallowance of commission expenses claimed - assessee is carrying on business in name of Rajasthan Small Scale Cottage Industries and is deriving income from sale of handicraft carpets and other similar items - HELD THAT - CIT(A) has not recorded any specific adverse findings on perusal of the reconciliation statement except in respect of two vehicles where she has relied on the findings of the AO in the remand report and held that vehicles are not found registered and prima facie the entries are fictitious in nature. Basis non-verification of two entries out of total 264 entries examined by the Assessing officer which represent less than 1% of the sample size it would be factually incorrect to hold that the assessee has failed to substantiate whole of his claim of commission expenditure. As we have held above in case of voluminous transactions some defined audit methodology and adequate sample size may be adopted to verify the expenses and being a factual matter it can vary from year to year. Once the sample size has been selected by the AO and which has been accepted by the ld CIT(A) the findings on examination of such sample size should be correlated and could reasonably be held representative only proportionality and not of the whole data under examination. In the instant case basis the sample size of less than 1% which remains unverified it is incorrect to hold that 100% of claim of commission expenditure remains unsubstantiated. We therefore deem it appropriate to restrict the disallowance of commission expenditure to the extent of 1% of Rs. 2, 08, 66, 037 which comes to Rs. 208, 660/- which remains unsubstantiated and the remaining addition is hereby directed to be deleted. Disallowance of 8% out of commission payment - For A.Y 2014-15 - HELD THAT - We find that the ld CIT(A) has followed and relied on her findings for A.Y 2013-14 and further held that in this year one entry out of total 55 entries examined by the Assessing officer remain unsubstantiated and therefore the assessee has failed to establish the genuineness of the whole of the commission expenditure. In his submission the assessee has submitted that in respect of one entry so pointed out by the Assessing officer and referred to by the CIT(A) there was a clerical mistake where in the voucher the vehicle number has wrongly been written as DL-132117 instead of DL-13C-2117 and besides that there is no other specific defect pointed out by the AO. Following our findings and reasoning given for AY 2013-14 we find that in absence of any specific finding by the Assessing officer except in respect of one entry where the vehicle number has been wrongly written by the assessee a mistake admitted by the assessee and not disputed by the Revenue the whole of commission expenditure cannot be disallowed. In the result the addition so made is directed to be deleted.

Summary

Issues Involved:
1. Sustenance of disallowance of commission expenses claimed by the assessee for AY 2013-14.
2. Sustenance of disallowance of commission expenses claimed by the assessee for AY 2014-15.

Detailed Analysis:

Issue 1: Disallowance of Commission Expenses for AY 2013-14

Facts of the Case:
The assessee, involved in the business of selling handicrafts, claimed sales commission expenses of Rs. 2,08,66,037. The Assessing Officer (AO) noted that the commission payments were made to taxi drivers, guides, etc., and observed that all payments were below Rs. 5,000, avoiding TDS deduction under Section 194H. Upon verification, the AO found discrepancies in the vehicle numbers provided in commission vouchers, leading to partial disallowance of the expenses.

AO’s Findings:
- 3.03% of entries (8 out of 264) were for vehicles registered after the transaction date.
- 67.42% of entries were for non-existent/non-registered vehicles.
- 18.56% of entries were for vehicles with expired fitness certificates.
- Total disallowance of Rs. 23,01,524 was made, considering 11.03% of the expenses as unsubstantiated.

CIT(A)’s Findings:
- The assessee was provided an opportunity to rebut the AO's findings.
- Despite reconciliation efforts, substantial discrepancies remained.
- Sustained the disallowance of 8% of the total commission expenses, citing past disallowances and the unverified nature of the expenses.

Tribunal’s Findings:
- The Tribunal noted that the AO’s sample size (264 entries) was representative but found only 2 out of 5 test cases unverified during the remand proceedings.
- Held that disallowance should be proportional to the unverified sample size.
- Directed to restrict the disallowance to 1% of the total commission expenses, amounting to Rs. 2,08,660, and deleted the remaining addition.

Issue 2: Disallowance of Commission Expenses for AY 2014-15

Facts of the Case:
The assessee claimed sales commission expenses of Rs. 3,21,66,062, with a portion paid in cash to taxi drivers/guides. The AO selected 55 vouchers for verification and found one non-existing vehicle entry, leading to a partial disallowance.

AO’s Findings:
- Disallowed Rs. 3,63,593, representing 1.83% of the commission for one bogus voucher.
- Additionally disallowed 8% of the remaining commission expenses, totaling Rs. 15,69,122, citing unverifiable nature.

CIT(A)’s Findings:
- Sustained the disallowance based on similar reasoning as AY 2013-14.
- Reiterated that the assessee failed to establish the genuineness of the commission expenses.

Tribunal’s Findings:
- Noted that the AO found only one incorrect entry out of 55, representing a clerical mistake.
- Following the reasoning for AY 2013-14, held that the whole commission expenditure cannot be disallowed based on one mistake.
- Directed to delete the addition made by the AO.

Conclusion:
The Tribunal provided a detailed analysis of the verification process and proportionality of disallowances. For AY 2013-14, it restricted the disallowance to 1% of the total commission expenses. For AY 2014-15, it directed the deletion of the entire disallowance, recognizing the clerical nature of the single incorrect entry. The decisions underscore the importance of proportionality and factual verification in disallowing business expenses.