2016 (10) TMI 1387 - AT - Income Tax

Disallowance of commission expenses - Whether allowable business expenditure? - HELD THAT - All the agents have confirmed that they have rendered the services and also received the commission. All the commission agents are being assessed to income tax and they have deposited tax liability after claiming normal business expenditure for earning such business income. Such income has been disclosed by the agent and identity of the commission agent is proved. We find that the agents have rendered the services motivated the agriculturists compilation of their requirements submission of return relating to land records prepare the file from Jan Panchayat office arranging delivery of goods by Marketing Federation sites supply of pipe installation of pipes to the agriculturists and maintenance of pipes for the prescribed period. Therefore the assessee has made these services. The Market Federation did not require any middleman for giving order to the company but when the notice was issued to Market Federation they have explained why the services of middleman is required. Therefore this has been explained by the Marketing Federation itself. Therefore CIT(A) has allowed the claim. Moreover the assessee has also claimed that it has earned more revenue after deputing the middleman commission agent. Therefore it may be allowed. Therefore we are of the view that the learned CIT(A) is justified in his action and our interference is not required at all. Decided against revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As decided in Kamal Kumar Jagdish Prasad 2016 (6) TMI 1474 - ITAT INDORE no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. The question of law is answered in favour of the assessee. Thus we set aside the orders of the authorities below with the direction to the Assessing Officer to consider the above High Court judgments cited above and decide the issue in view thereof after affording a reasonable opportunity of being heard to the assessee. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Disallowance of interest expenses under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

Issue 1: Disallowance of Commission Expenses

The assessee, engaged in the manufacturing of pipes and fittings, declared an income of Rs. 6,62,45,740/- and claimed brokerage and commission expenses of Rs. 2,51,45,944/-. The Assessing Officer (AO) disallowed Rs. 2,02,07,630/- of these expenses, citing that the assessee failed to substantiate the genuineness of the commission payments. The AO's investigation revealed discrepancies, such as the non-requirement of commission agents for sales to Government Departments and inconsistencies in the verification of agents' identities and services.

The CIT(A) overturned the AO's decision, noting that the commission agents rendered extensive services, including procuring orders, dispatching goods, and facilitating payments from Government Departments. The CIT(A) found that the agents were assessed to income tax, had filed returns, and the payments were made by account payee cheques after deducting TDS. The CIT(A) emphasized that the AO's adverse conclusions were based on misleading questions and insufficient inquiries into the services rendered by the agents.

The Tribunal upheld the CIT(A)'s decision, recognizing the necessity of commission agents for facilitating sales and the comprehensive nature of services provided. The Tribunal referenced the Delhi High Court's judgment in CIT vs. Ram Pistons & Rings Ltd., which supported the legitimacy of commission payments when services are substantiated.

Issue 2: Disallowance of Interest Expenses under Section 14A

The assessee appealed against the CIT(A)'s confirmation of the disallowance of Rs. 40,16,463/- out of gross interest paid, invoking Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. The Tribunal referred to its earlier decision in Kamal Kumar Jagdish Prasad Lath, where the Delhi High Court's judgment in Joint Investment Pvt. Ltd. was cited. The High Court held that disallowance under Section 14A should not exceed the tax-exempt income and must be based on a proper examination of accounts.

Following this precedent, the Tribunal set aside the orders of the authorities below and directed the AO to reconsider the issue in light of the High Court's judgment, ensuring a reasonable opportunity for the assessee to be heard.

Conclusion:

The Tribunal dismissed the revenue's appeal regarding the disallowance of commission expenses and allowed the assessee's appeal for statistical purposes concerning the disallowance under Section 14A. The order was pronounced in open Court on 27th October 2016.