2007 (5) TMI 112 - HC - Income Tax

Court upholds Tribunal decision on commission payments lack of justification & evidence

The High Court upheld the Tribunal's decision regarding the assessment of increased commission payments to related parties by the Assessee for tax years ... Business Expenditure - AO contended that assessee has unjustifiably increased the rate of commission to lower his income and accordingly addition were made - Held that AO contention was correct and addition was sustainable Issues:Assessment of increased commission payment to related parties for tax years 1991-92 and 1992-93.Analysis:The Assessee, engaged in manufacturing cycle tyres and tubes, faced scrutiny by the Assessing Officer due to a significant increase in commission payments to related parties. The commission paid to two parties, M/s Associates Agencies and M/s Sawhney Tyres, increased from 2% to 3% for the relevant period, resulting in a total payment of Rs. 55,68,854 on sales of Rs. 18,56,28,522. The Assessing Officer questioned the justification for this increase, especially as the parties were closely related to the Assessee. It was alleged that the Assessee increased the commission to lower their income by transferring funds to related firms. The Commissioner of Income Tax (Appeal) later deleted the addition, citing the opening of new branches and increased expenses as justifications for the excess commission.The Revenue, dissatisfied with the Commissioner's decision, filed appeals before the Tribunal, which allowed the Revenue's appeals. The Assessee argued that the commission increase was necessary due to heavy expenses incurred by selling agents following the opening of new branches. They contended that the increase was to compensate for losses incurred by selling agents due to increased expenses. Citing a precedent, the Assessee argued that the Revenue cannot dictate reasonable expenditure levels for a business. However, the Revenue maintained that the commission increase was unjustified, as evidenced by the subsequent reduction in commission rates.The Tribunal found that there was no substantiation for the claim that the commission increase was to offset new branch expenses. The Tribunal noted that the increased commission rate was only effective for the year under consideration and reverted to the previous rate thereafter. The Tribunal concluded that there was no justification for the commission increase and reversed the Commissioner's decision. The High Court upheld the Tribunal's decision, emphasizing that it was a factual finding and not a question of law. The Court dismissed the Assessee's appeals, finding no fault with the Tribunal's reasoning.In summary, the judgment dealt with the assessment of increased commission payments to related parties by the Assessee for the tax years 1991-92 and 1992-93. The court affirmed the Tribunal's decision that the commission increase lacked justification and was not supported by evidence of increased expenses. The judgment highlighted that the issue was a factual finding rather than a question of law, leading to the dismissal of the Assessee's appeals.