Business expenditure and tax deduction rules applied to broker commission, freight costs, sister concern payments, and demurrage charges.

Commission paid to a resident broker for introducing buyer and seller of iron ore was treated as allowable business expenditure because the service was rendered, the recipient had returned the income, and no colourable device was shown. Commission paid to a non-resident agent was also allowed, as the agent had no permanent establishment in India and the income was not chargeable to tax in India, so no tax deduction obligation arose under section 195 and disallowance under section 40(a)(i) could not stand. Restricted disallowance of transportation and labour s was sustained due to inadequate vouchers. Crushing and screening charges paid to a sister concern were not disallowed in the absence of any finding of excessiveness under section 40A(2). Demurrage disallowance was restored following binding precedent on tax deduction.

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Issues: (i) Whether commission paid to a resident broker for introducing the purchaser and supplier of iron ore was an allowable business expenditure; (ii) whether commission paid to a non-resident foreign agent was liable to disallowance for non-deduction of tax at source; (iii) whether disallowance out of transportation and labour expenses incurred through cash and self-made vouchers was justified; (iv) whether disallowance of crushing and screening charges paid to a sister concern was warranted; and (v) whether disallowance of demurrage payments without tax deduction at source was sustainable.

Issue (i): Whether commission paid to a resident broker for introducing the purchaser and supplier of iron ore was an allowable business expenditure.

Analysis: The commission agent's essential function was to bring the parties together, and once the buyer and seller were introduced, the service stood rendered. The recipient had filed a return and paid tax on the receipt, and the surrounding circumstances did not establish that the payment was a colourable device or that the expenditure lacked business purpose.

Conclusion: The commission paid to the resident broker was allowable and the disallowance was rightly deleted, in favour of the assessee.

Issue (ii): Whether commission paid to a non-resident foreign agent was liable to disallowance for non-deduction of tax at source.

Analysis: Where the foreign agent had no permanent establishment in India and the commission represented business profits not chargeable to tax in India, no obligation to deduct tax arose under section 195. In such a situation, disallowance under section 40(a)(i) could not be sustained.

Conclusion: The commission paid to the non-resident agent was not liable to disallowance for non-deduction of tax at source, in favour of the assessee.

Issue (iii): Whether disallowance out of transportation and labour expenses incurred through cash and self-made vouchers was justified.

Analysis: The transportation expenditure was not fully vouched and the exact basis of payments to individual truck owners was not established, but the disallowance made on a pure estimate was excessive. The restricted disallowance sustained by the first appellate authority reflected the deficiencies in proof while recognising that the expenditure had in fact been incurred. The labour charges were also supported only by self-made vouchers and the factual finding of inadequate supporting evidence was not shown to be perverse.

Conclusion: The restricted disallowance out of transportation expenses and the disallowance out of labour charges were sustained, against the assessee.

Issue (iv): Whether disallowance of crushing and screening charges paid to a sister concern was warranted.

Analysis: The Assessing Officer had accepted that the expenditure had been incurred but sought to reduce it merely on the view that only part of the work was necessary. In the absence of any finding under section 40A(2) that the payment was excessive or unreasonable, the Assessing Officer could not substitute his own business judgment for that of the assessee.

Conclusion: The disallowance of crushing and screening charges was not justified and was rightly deleted, in favour of the assessee.

Issue (v): Whether disallowance of demurrage payments without tax deduction at source was sustainable.

Analysis: The governing issue was covered by the jurisdictional High Court decision holding that such payments attracted the provisions dealing with deduction of tax at source and did not fall outside the charging mechanism in the manner suggested by the assessee. Following that binding precedent, the appellate relief could not be maintained.

Conclusion: The disallowance of demurrage payments was restored, against the assessee.

Final Conclusion: The decision grants relief to the assessee on the commission issue involving the resident broker, the foreign commission payment, and the crushing and screening charges, but sustains the restricted transportation and labour disallowances and restores the demurrage disallowance.

Ratio Decidendi: Where a non-resident recipient has no permanent establishment and the payment is not chargeable to tax in India, no tax is deductible at source under section 195; conversely, an Assessing Officer cannot disallow genuine business expenditure merely by substituting his own estimate of commercial necessity or rate in the absence of a specific statutory disallowance provision.

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