TEST OF ‘COMMERCIAL EXPEDIENCY’ FOR DETERMINING EXPENDITURE

[DR.MARIAPPAN GOVINDARAJAN]

Expenditure is usually allowed to be deducted in the income of a business entity.  We came across many a litigation in allowing or disallowing a particular type of expenditure in an assessment year.  Such litigation rose up to the level of Supreme Court.  The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business.    It may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.  The Revenue should put itself in the shoes of an assessee and then see how a prudent businessman would act.

In ‘Commissioner of Income Tax, Bombay V. Walchand and Co. Private Limited’; - 1967 (3) TMI 2 - SUPREME Court the Supreme Court has held that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively for the purposes of the business, the expenditure has to be adjudged from the point of view of the business and not of revenue. 

In ‘Income Tax Officer, Ward – 1 (3), New Delhi V. M/s Alpasso Industries Private Limited’ – 2017 (11) TMI 187 – ITAT, New Delhi, decided on 31.10.2017, the assessee acted as an agent of M/s Hyosung Corporation Power and Industrial Systems PG Korea.  The said company was awarded a purchase order worth of $16,73,76,986 for supply of transformers by M/s Power Grid Corporation of India Limited. (PGCIL for short)  The assessee has shown commission income received from the said company.  The Assessing Officer observed that assessee has also incurred commission expenditure of rupee one crore to M/s AGR Steel Strips Private Limited. (‘AGR’ for short).

The Assessing Officer issued notice to AGR calling for information containing details of services rendered and documentary evidence supporting the services rendered, services rendered to any other parties etc.,  AGR filed reply to the Assessing Officer that it provided requisites services to procure purchase order supply of power transformers from  PGCIL and incurred necessary expenses of travelling, conveyance, telephone etc., for providing the services, as reflected in the profit and loss account.

The Assessing Officer observed that AGR has not provided detail of services rendered to the assessee and no supporting documentary evidence which could prove the fact of having expert technical staff and field experience in providing services in the power sector by the party.

The Assessing Officer asked the assessee to justify the allowability of commission paid.  The assessee submitted the justification as detailed below-

• AGR had knowledge of bidding process and contacted the assessee and offered their services and in view of the past experience the assessee engaged them for rendering co-ordination and follow-up services in respect of bid submitted by M/s Hyosung Corporation, Korea to PGCIL;
• The said company was engaged in manufacturing and counseltancy and commission business and board of directors of the company were supported by a team of dedicated qualified technical and commercial professionals;
• The said company rendered coordination and follow up services and for rendering such services, only communication facility was required as most of the work was done telephonically or verbally and sometimes might have to visit various offices and expenses for which were accounted in the respective head in the profit and loss account of said company.No expenses on purchase of material was required;
• The Commission expenses incurred by the assessee neither are personal nor are of capital nature and being incurred wholly and exclusive for the purpose of business, same are allowable.

The Assessing Officer rejected the submissions of the assessee on the ground that-

• The arrangements entered into with sub agent AGR were dated 14.04.2008 and 08.09.2008 where as the PGCIL awarded the contract to M/s Hyosung Corporation only on 29.12.2008 and 05.03.2009 i.e, much after the date of the agreement with subagent;
• In the contract agreement with subagent, there was no mention of a specific service to be provided by the subagent and the percentage of commission of payment on the basis of the services was also not provided;
• The assessee as well as AGR failed to give the date wise details of services provided by the sub-agent and expenses incurred, person contacted, report submitted by the sub-agent;

The Assessing Officer concluded that merely deduction of TDS and giving payment by cheque did not prove the genuineness of the transaction and accordingly, disallowed the commission ₹ 1 crore paid to AGR.

Aggrieved by the order of Assessing Officer, the assessee filed an appeal before Commissioner (Appeals).  Before the Commissioner (Appeals) the assessee contended that in the present high tech business environment for rendering such services one need communication facility as most of the work is done telephonically or verbally and sometimes the agent has to visit various offices leaving behind almost no paper work.  It is not necessary that always reports are prepared and submitted by the agents to earn income.  The assessee has secured orders with the services of sub agent which clearly established that such business has been carried on.

The Commissioner (Appeals) allowed the appeal and deleted the addition of commission paid.  The Commissioner (Appeals) held that the appellant has submitted relevant details to the Assessing Officer and AGR has submitted all details including the bank details etc.,  The commission paid was duly incorporated as income in the accounts of AGR and the same was charged to tax.   No cash was withdrawn.  It cannot be said that the appellant has failed to establish the genuineness and business need for incurring the expenses.  The services provided have also been duly explained.

The Revenue filed appeal before the Tribunal against the order of Commissioner (Appeals).  The Revenue submitted the following before the Tribunal-

• The assessee has not furnished any documentary evidence in support of the services rendered by the sub agent;
• The assessee has not given specific of the services rendered except the general description of coordination and follow up services;
• The assessee has not given evidence of any interaction of the sub agent with the authorities of the PGCIL in the process of coordination and follow up services, despite specifically being asked for finishing such evidence;
• Preparing agreements for commission payment, raising of bills by the sub agent and charging service tax in the bills, deducting TDS by the assessee on such payment etc., are merely paper formalities and cannot justify the factum of the services rendered by the sub agent;
• It cannot be established that the expenditure was incurred wholly and exclusively for the purpose of business of the assessee and therefore the action of the Assessing officer in disallowing the commission payment was justified;

The assessee submitted the following before the Tribunal-

• The assessee took services of the subagent in immediately preceding year i.e., assessment year 2009 – 10 and the commission expenses has been allowed;
• In view of the principle of consistency, the commission payment during the year should also be allowed;
• It is well settled that the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case;
• No businessman can be compelled to maximize its profit;
• Income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act;
• The authorities must not look at the matter from their own view point but that of a prudent businessman.

The Tribunal heard both the parties.   The Tribunal held that the findings of the Commissioner (Appeals) are not based on the proper appreciation of the facts on the record.  The Appellate Authority has not referred any documents to controvert the findings of the Assessing Officer.  The copies of bills or ledger accounts and documents to record the transaction in the books of accounts for the services rendered are not document evidencing the services rendered.  Similarly payment through bank of service tax challan payment by the sub agent in itself cannot prove that sub agent actually rendered the services.  In the opinion of the Tribunal the fact of services rendered needs to be examined in each year and by accepting the services rendered in one year, it cannot be established that the assessee might have rendered services in another year also and thus the rule of consistency cannot be applied in the facts of the case.

The Tribunal further held that the assessee failed to submit any evidence in support of services rendered except the claim that services were rendered telephonically.  The assessee has not furnished any confirmation either from the principal company or from PGCIL that the sub agent has provided the services of coordination and follow up in the process of bidding of tenders for contracts.  In this case the pre requisite of establishing services rendered by the sub agent has not been fulfilled by way of producing relevant documentary evidences.  The Tribunal set aside the order of the Commissioner (Appeals) and restored the order of Assessing Officer.