Facts of the Case

The assessee, M/s Hind Nihon Proteins Pvt. Ltd., had paid commission to two partnership firms, namely M/s Sikand Farm and M/s R&A Exports, for procuring business orders. These entities were related to the directors of the assessee company.

The Assessing Officer disallowed the commission expenditure on the ground that the assessee failed to establish the exact nature of services rendered. The Commissioner of Income Tax (Appeals) upheld the disallowance.

However, the ITAT deleted the addition after examining the agreements, confirmations, books of accounts, and tax returns of the commission recipients, holding the expenditure to be genuine and allowable. The Revenue challenged the ITAT’s findings before the Delhi High Court under Section 260A.

Issues Involved

  1. Whether commission payments made to related entities were genuine business expenditure under Section 37?
  2. Whether the ITAT’s finding regarding services rendered by commission agents was perverse and unsupported by evidence?
  3. Whether the Revenue could disallow expenditure after accepting corresponding commission income in the hands of recipients?

Petitioner’s Arguments (Revenue Department)

  • The Revenue contended that the ITAT wrongly deleted the disallowance of commission expenditure.
  • It argued that no sufficient evidence existed to establish actual services rendered by the commission agents.
  • The Revenue alleged that the payments were made to related concerns and lacked business justification.
  • It was submitted that the expenditure should not qualify as allowable deduction under Section 37.

Respondent’s Arguments (Assessee Company)

  • The assessee submitted that written commission agreements were duly executed with the agents.
  • Commission was paid strictly on the basis of business orders procured.
  • The recipients accounted for the commission income in their books and paid taxes on it.
  • Similar commission payments had been accepted by the Revenue in earlier and subsequent assessment years.
  • The assessee argued that once the Revenue accepted the income in the hands of recipients, it could not dispute the expenditure in the hands of the payer.

Court Findings / Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeals.

The Court held:

  • The ITAT’s findings were based on proper documentary evidence, including agreements, confirmations, and tax records.
  • The Revenue had failed to summon or examine the commission agents despite having the opportunity.
  • The payments were genuine business transactions and not a tax avoidance mechanism.
  • Mere relationship between the assessee and commission recipients could not be a ground for disallowance.
  • The finding of the ITAT could not be termed “perverse.”

Accordingly, the question of law was answered in favour of the assessee and against the Revenue.

Important Clarification

This judgment clarifies that:

  • Commission expenditure is allowable where documentary evidence supports the transaction.
  • Acceptance of commission income in the recipient’s assessment strengthens the genuineness of the expenditure.
  • The burden shifts to the Revenue once the assessee discharges the initial burden of proof.
  • Findings of fact by the ITAT cannot be interfered with unless proved perverse.

Sections Involved

  • Section 37, Income Tax Act, 1961 (Business Expenditure)
  • Section 260A, Income Tax Act, 1961 (Appeal to High Court)
  • Section 143(1)(a), Income Tax Act, 1961
  • Section 143(3), Income Tax Act, 1961
  • Section 80HH, Income Tax Act, 1961
  • Section 80-I, Income Tax Act, 1961

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:258-DB/CSH10012018ITA5742005.pdf

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