Facts of the Case

  1. The assessee was engaged in the manufacture and sale of pharmaceutical formulations.
  2. The assessee claimed deduction of commission paid to various agents for facilitating supplies to Government institutions.
  3. The Assessing Officer disallowed the commission expenditure.
  4. According to the Assessing Officer:
    • Government contracts are obtained through tenders.
    • No commission agent is required for securing such contracts.
    • No services had actually been rendered by the agents.
  5. The disallowance was also influenced by a statement recorded during a survey conducted at the premises of Chartered Accountant Sanjay Rastogi.
  6. One of the entities named in the statement was M/s Hallmark Health Care Ltd., which had received commission from the assessee.
  7. Reassessment proceedings for Assessment Year 1997-98 had earlier been initiated against the assessee on the basis of the same allegations but were subsequently dropped.
  8. The CIT(A) examined the evidence and held that services had in fact been rendered by the commission agents.
  9. The ITAT affirmed the findings of the CIT(A).
  10. The Revenue challenged the Tribunal’s order before the Delhi High Court.

 

Issues Involved

  1. Whether commission paid to agents for facilitating business with Government institutions qualifies as allowable business expenditure under Section 37(1).
  2. Whether commission expenditure could be disallowed merely because Government contracts are awarded through tender processes.
  3. Whether the statement of a third party recorded during survey proceedings was sufficient to deny deduction.
  4. Whether the assessee had established that services were actually rendered by the commission agents.
  5. Whether any substantial question of law arose from the findings of the CIT(A) and ITAT.

 

Petitioner’s Arguments (Revenue)

  • The Revenue contended that Government purchases are made through formal tender procedures and therefore no commission agent is required.
  • It was argued that the commission payments lacked commercial necessity.
  • Reliance was placed on the statement of Sanjay Rastogi, who allegedly admitted to providing accommodation entries.
  • The Revenue maintained that the assessee had failed to prove actual rendering of services by the agents.
  • Consequently, the expenditure did not qualify for deduction under Section 37(1).

 

Respondent’s Arguments (Assessee)

  • The assessee argued that the agents had rendered genuine services in connection with Government institutional sales.
  • The services included pre-tender assistance, market intelligence, follow-up activities, coordination and post-tender support.
  • Documentary evidence, confirmations and supporting records were produced.
  • The assessee pointed out that the same commission agent had been accepted as genuine in earlier proceedings.
  • It was also emphasized that Sanjay Rastogi was never produced for cross-examination despite specific requests.

 

Court Findings

The Delhi High Court observed that:

  • The CIT(A) had conducted a detailed examination of the evidence and concluded that the commission agents had actually rendered services.
  • The ITAT affirmed these factual findings.
  • The reassessment proceedings for Assessment Year 1997-98 based on similar allegations had ultimately been dropped.
  • The recipients of commission had confirmed both receipt of commission and rendering of services, including in proceedings under Section 133(6).
  • No evidence was found during search or survey proceedings showing that the commission payments were bogus.
  • The Tribunal rightly observed that although Government transactions cannot be procured through middlemen, agents may legitimately assist in pre-tender and post-tender activities and facilitate information flow.
  • The evidence supported the assessee’s explanation regarding services rendered by the agents.

 

Court Order / Findings

  • The Delhi High Court upheld the orders of the CIT(A) and the ITAT.
  • The commission expenditure claimed by the assessee was held to be allowable.
  • The Court accepted the factual findings that genuine services had been rendered by the agents.
  • No substantial question of law arose from the Tribunal’s order.
  • All Revenue appeals were dismissed.

 

Important Clarification

  • Commission expenditure cannot be disallowed merely because Government purchases are made through tender processes.
  • Even where contracts are awarded through tenders, agents may render legitimate business support services.
  • The allowability of commission depends on proof of actual services rendered and business purpose.
  • Third-party statements cannot automatically justify disallowance when contrary documentary evidence exists.
  • Findings of fact recorded by the CIT(A) and ITAT will ordinarily not be interfered with under Section 260A.

 

Sections Involved

  • Section 37(1) – Business Expenditure
  • Section 148 – Reassessment Proceedings
  • Section 133(6) – Power to Call for Information
  • Section 260A – Appeal to High Court
  • Income-tax Act, 1961

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9469-DB/AKS19112009ITA11282009_153823.pdf

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