2017 (12) TMI 1529 - AT - Income Tax

Tribunal overturns disallowance of commission expenses, emphasizes need for evidence & natural justice

The Tribunal allowed the assessee's appeal, overturning the disallowance of Rs. 1,17,47,513 in commission expenses. It concluded that the lower ... Addition on account of commission expenses claimed - No opportunity of cross examination - Held that:- AO in the instant case has no evidence other than the statement of Manoj Sarda that would prove that the commission entries were merely paper entries, On the other hand the assessee has produced many documentary evidences to prove the genuineness of the commission transaction. The commission agents too have confirmed the transactions, which have been duly accounted for in their books of accounts. Therefore, the action of the AO in ignoring all the strong material evidence brought on record and merely relying on the statement of a third party (that too a statement which is contradicting the party's own written confirmation) is not justified. The opportunity of cross examination given was inadequate and illusory. Since, inadequate opportunity was given to the assessee, the assessment was vitiated by violation of principles of natural justice and therefore the statement of Mr. Sarda does not constitute valid evidence against the assessee. After considering the facts in totality, we are of the view that the addition made by the lower authorities is not sustainable. Hence the ground of appeal of the assessee is allowed. Issues Involved:1. Disallowance of commission expenses claimed by the assessee.2. Verification of the genuineness of the commission expenses.3. Opportunity for cross-examination of witnesses.4. Burden of proof on the assessee to establish the genuineness of the commission payments.5. Adherence to principles of natural justice.Detailed Analysis:1. Disallowance of Commission Expenses:The sole issue raised by the assessee was the disallowance of Rs. 1,17,47,513 on account of commission expenses. The assessee, a partnership firm engaged in manufacturing and trading iron and steel materials, claimed a commission expense of Rs. 1,18,47,513 for the assessment year 2008-09. The Assessing Officer (AO) compared the commission expenses and turnover with the previous year and found a disproportionate increase in commission expenses (50896%) compared to the turnover increase (26.9%).2. Verification of Genuineness of Commission Expenses:The AO issued notices under section 131 of the Income Tax Act to six parties to verify the genuineness of the commission expenses. Four parties appeared and provided statements, while the remaining two provided necessary documents. Additionally, the AO issued notices under section 133(6) to seven parties to whom the assessee made sales, all of whom confirmed no broker involvement. Consequently, the AO disallowed Rs. 1,17,47,513, allowing only Rs. 1,00,000 based on the previous year's commission expenses.3. Opportunity for Cross-Examination:The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that the commission agents provided essential services due to increased competition and market volatility. The CIT(A) noted that the AO examined the commission recipients under section 131, who could not substantiate the services rendered. The CIT(A) observed that the assessee was given a chance to cross-examine the parties but did not avail of it, citing the Calcutta High Court's decision in Hindustan Tobacco Company vs. CIT, which held that failing to cross-examine at the appropriate stage precludes raising the issue later.4. Burden of Proof:The CIT(A) upheld the AO's disallowance, emphasizing that the burden of proof lies on the assessee to establish that the commission payments were for services rendered. The CIT(A) cited various judicial precedents, including Vishnu Agencies (P) Ltd. and Lachminaryan Madan Lal, which state that mere payment or existence of an agreement does not entitle an assessee to a deduction unless the services rendered are substantiated.5. Principles of Natural Justice:The Tribunal noted that the AO did not adhere to the principles of natural justice by not issuing a summon under section 131 to the assessee for confrontation after recording the statements of the parties. The Tribunal relied on the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that not allowing cross-examination violates principles of natural justice. The Tribunal also referenced other judicial decisions emphasizing the necessity of cross-examination to test the truth of oral evidence.Conclusion:The Tribunal concluded that the lower authorities did not bring any defect in the documents submitted by the assessee to disprove the genuineness of the transactions. The Tribunal emphasized that the AO's reliance solely on statements without tangible evidence was insufficient. The Tribunal allowed the assessee's appeal, noting that the addition made by the lower authorities was not sustainable due to the failure to adhere to principles of natural justice and the lack of evidence to disprove the genuineness of the commission payments. The appeal was thus allowed, and the disallowance of Rs. 1,17,47,513 was overturned.