2013 (1) TMI 569 - AT - Income Tax

Assessee's appeal dismissed by ITAT for commission and interest disallowance. Lack of evidence cited.

The appeal of the assessee was dismissed by the ITAT, upholding the disallowance of commission and interest by the AO and CIT(A). The ITAT found no reason ... Disallowance of payments to related parties as not wholly and exclusively for business under section 40A(2)(b) - requirement of documentary evidence to prove services rendered by a selling agent - commercial expediency test for advances to sister concerns - disallowance of interest as diversion of borrowed funds under section 36(1)(iii)Disallowance of payments to related parties as not wholly and exclusively for business under section 40A(2)(b) - requirement of documentary evidence to prove services rendered by a selling agent - Validity of disallowance of commission of Rs.17,20,403 paid to a firm in which assessee's directors had substantial interest - HELD THAT: - The Tribunal upheld the disallowance under the principles applied by the A.O. and CIT(A). The assessee produced board resolution, copies of bills, credit/debit notes and sample correspondence but no documentary evidence showing that the firm actually rendered services, introduced customers, procured sales or secured payments as required by the agency agreement. The profit & loss schedule showed that the firm earned commission only from the assessee and not from other parties, and the firm carried substantial brought forward losses, indicating it was not an established commission agent. The Tribunal accepted the view that mere existence of an agreement and payment of commission does not prove services were rendered or that payments were wholly and exclusively for business; on the material before it the payments appeared to be a device benefiting related parties and lacking commercial expediency, and therefore properly disallowed under the provision invoked. [Paras 6]Addition of Rs.17,20,403 on account of commission was sustained.Commercial expediency test for advances to sister concerns - disallowance of interest as diversion of borrowed funds under section 36(1)(iii) - Validity of disallowance of proportionate interest of Rs.79,692 where interest bearing borrowings were alleged to have been used to make interest free advances to a sister concern - HELD THAT: - The Tribunal agreed with CIT(A) that the undisputed facts show the assessee borrowed interest bearing funds and also made interest free advances to its sister concern. The assessee failed to demonstrate any commercial expediency necessitating interest free advances. Applying the settled principle that absence of commercial expediency permits treating such advances as diversion of borrowed funds, the proportionate interest attributable to the diverted funds was correctly disallowed. No material was placed before the Tribunal to overturn CIT(A)'s finding of lack of commercial expediency. [Paras 10]Disallowance of interest to the extent worked out by the A.O. was upheld.Final Conclusion: Appeal dismissed; Tribunal sustained the additions: (i) commission paid to a related firm disallowed for lack of evidence of services and commercial expediency, and (ii) proportionate interest disallowed as diversion of borrowed funds to a sister concern without commercial expediency. Issues Involved:1. Disallowance of Commission.2. Disallowance of Interest.3. Miscellaneous - Charge of interest under section 234B of the Income Tax Act.Detailed Analysis:1. Disallowance of Commission:The assessee, a company engaged in trading yarn and high seas sales, had paid a commission of Rs. 17,20,403 to a firm (M/s Motilon Synthetics) where the directors of the assessee company had substantial interest. The Assessing Officer (AO) disallowed this payment under section 40A(2)(b) of the Income Tax Act, as the firm did not engage in any activity other than the alleged high seas sales and had no other income except from the assessee. The AO concluded that no services were rendered by Motilon Synthetics and the payment was for extra commercial considerations. The CIT(A) upheld this disallowance, citing the lack of documentary evidence proving that services were rendered by Motilon Synthetics. The CIT(A) referenced the Supreme Court decisions in Lachiminarayan Madan Lal and Swadeshi Cotton Mills Ltd., which stated that mere existence of an agreement or payment of commission does not prove that services were rendered or that the payment was for business purposes. The ITAT also upheld the CIT(A)'s decision, noting that the assessee failed to provide evidence of compliance with the conditions set out in the appointment letter and that Motilon Synthetics had not earned any commission from other parties, indicating it was not in the business of commission agency.2. Disallowance of Interest:The AO disallowed Rs. 79,692 out of the total interest of Rs. 5,57,130 paid by the assessee on borrowed funds from its sister concern, Motilon Synthetics, as the assessee had also given an interest-free advance to another sister concern, Baba Synthetics. The AO concluded that the borrowed funds were not utilized for business purposes. The CIT(A) upheld this disallowance, referencing the Supreme Court decision in S.A. Builders, which allows disallowance of interest if loans/advances are given without commercial expediency. The CIT(A) noted that the assessee failed to demonstrate any commercial expediency for giving interest-free loans to Baba Synthetics. The ITAT also upheld the CIT(A)'s decision, as the assessee could not provide any material evidence to prove the commercial expediency of the interest-free loans.3. Miscellaneous - Charge of Interest under Section 234B:The CIT(A) did not consider the charge of interest under section 234B of the Income Tax Act. This issue was not adjudicated separately as it was deemed general and consequential in nature.Conclusion:The appeal of the assessee was dismissed, with the ITAT upholding the decisions of the AO and CIT(A) on both the disallowance of commission and interest. The ITAT found no reason to interfere with the CIT(A)'s findings due to the lack of evidence provided by the assessee to substantiate their claims. The other grounds raised were not adjudicated as they were general and consequential. The order was pronounced in open court on 28.12.2012.