2012 (8) TMI 670 - AT - Income Tax

ITAT Upholds Decision on Sales Commission as Legitimate Business Expense

The ITAT upheld the Ld. CIT(A)'s decision, dismissing the Revenue's appeal. The Tribunal affirmed that the sales commission paid to M/s. Rupali Traders ... Disallowance of sales promotion expenses – Held that:- Revenue has not rebutted the fact that in the earlier years the expenditure qua the sales promotion commission was allowed and assessee has placed on record a copy of each of the assessment orders for A.Ys. 1996-97 and 2002-03, it is evident there from that no disallowance has been made in respect of expenditure claimed for sale promotion commission - disallowance deleted - Revenue’s appeal is dismissed. Issues Involved:1. Justification of the sales commission paid to M/s. Rupali Traders.2. Applicability of Section 40A(2)(b) of the Income-tax Act, 1961.3. Consistency in the treatment of sales commission in previous assessment years.4. Opportunity for the assessee to provide explanations and evidence.Detailed Analysis:1. Justification of the Sales Commission Paid to M/s. Rupali Traders:The primary issue in this appeal is whether the sales commission of Rs. 10,64,461/- paid by the assessee to M/s. Rupali Traders is justified. The Assessing Officer (AO) disallowed this commission on the grounds that the job contract was repetitively procured from Sud Chemie India Pvt. Ltd. directly, and the assessee could not justify the need to pay the commission to M/s. Rupali Traders. The AO concluded that since the job work was consistently obtained from a single party, third-party services were not required. The AO also relied on the statement of Shri Daxesh Mehta, Assistant Manager (Accounts) of Sud Chemie India Pvt. Ltd., who indicated that no external services were needed for procuring job work or collecting payments.2. Applicability of Section 40A(2)(b) of the Income-tax Act, 1961:The AO invoked Section 40A(2)(b) of the Income-tax Act, which deals with payments to related parties, to disallow the commission. The assessee argued that the commission was a genuine business expenditure and that M/s. Rupali Traders provided necessary marketing services. The assessee also highlighted that M/s. Rupali Traders is a partnership firm with qualified partners, and there was no intention to evade tax. The Ld. CIT(A) found that the AO did not provide the assessee with an opportunity to explain or furnish evidence before making the disallowance. The Ld. CIT(A) also noted that the commission was paid for legitimate business purposes, including technical guidance and quality assurance.3. Consistency in the Treatment of Sales Commission in Previous Assessment Years:The assessee pointed out that similar commissions were allowed in previous assessment years (1996-97 and 2002-03) under scrutiny assessments. The Ld. CIT(A) acknowledged this consistency and noted that the commission had been paid for over ten years on the same basis and percentage. The Ld. CIT(A) emphasized that the commission was allowed in earlier years, and there was no change in circumstances to justify a different treatment in the current year.4. Opportunity for the Assessee to Provide Explanations and Evidence:The Ld. CIT(A) found that the AO did not issue a show-cause notice or provide the assessee with an opportunity to explain the nature of services rendered by M/s. Rupali Traders before making the disallowance. The Ld. CIT(A) considered the confirmatory letter from Sud Chemie India Pvt. Ltd., which supported the role of M/s. Rupali Traders in securing and managing the job work contract. The Ld. CIT(A) also noted that M/s. Rupali Traders incurred various expenses to earn the commission income, further supporting the genuineness of the transactions.Conclusion:The ITAT upheld the order of the Ld. CIT(A), dismissing the Revenue's appeal. The Tribunal found no infirmity in the Ld. CIT(A)'s order, emphasizing that the commission was a legitimate business expenditure, consistently allowed in previous years, and that there was no evidence of tax evasion. The Tribunal also noted that the Revenue did not dispute the facts presented by the assessee and failed to demonstrate how the expenditure was excessive or unreasonable. Consequently, the appeal filed by the Revenue was dismissed.