ITAT allows appeal, cancels disallowance of commission expenditure & incentives due to TDS non-deduction.

The ITAT allowed the appeal of the assessee, deleting both the disallowance of Rs. 20,33,762/- out of commission expenditure and the disallowance of Rs. 62,000/- paid as incentives to the ex-employee due to non-deduction of TDS. The order was pronounced in the open court on 31st January 2019.

---

---

Issues Involved:
1. Disallowance of Rs. 20,33,762/- out of commission expenditure paid on purchases made by the assessee.
2. Disallowance of salary paid under the head incentives of Rs. 62,000/- to an ex-employee due to non-deduction of TDS.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 20,33,762/- out of commission expenditure:

The assessee, a trader in chemicals used in paper industries, showed sales of Rs. 2,67,45,976/- and purchases of Rs. 1,73,06,954/- for the relevant financial year. The assessee debited Rs. 26,50,000/- under the head "Commission account," which the AO found excessive, noting that the commission rate was more than 10%. The assessee explained that the commission was paid to various agents for introducing parties to purchase contracts and ensuring product quality. The AO, however, deemed the commission payments excessive and unreasonable, especially since the items purchased were non-monopolistic and widely available. The AO summoned three persons under section 131(1), and despite one person, Shri Anuj Sharma, providing a detailed statement on the services rendered, the AO disallowed Rs. 20,33,762/- of the commission payments, allowing only 3% as reasonable.

The CIT (A) confirmed the AO’s disallowance, stating that the inquiries made under section 131 did not substantiate the high commission rates, and agreements produced by the assessee were not genuine. The CIT (A) upheld the AO's decision to allow only 3% commission.

The assessee argued that the commission payments were consistent with previous years, which were accepted in scrutiny proceedings, and that the high commission was justified due to the sensitive nature of the chemicals and the need for quality assurance. The ITAT found that the payment of commission was a genuine transaction and a regular feature of the assessee’s business. The ITAT noted that the revenue had accepted similar rates in previous years and that the agents were unrelated persons under section 40A(2)(b). The ITAT concluded that the revenue could not disallow the expenditure as excessive without evidence of comparable cases or material showing the payments were unreasonable. The ITAT deleted the disallowance of Rs. 20,33,762/-.

2. Disallowance of salary paid under the head incentives of Rs. 62,000/-:

The AO observed that the assessee debited Rs. 1,78,000/- on account of sales incentives, with Rs. 62,000/- paid to Shri Amit Kumar, an ex-employee. The AO treated this payment as commission, requiring TDS deduction under section 194H, and disallowed it under section 40A(ia).

The CIT (A) upheld the AO’s disallowance, agreeing that the incentive payment was in the nature of commission and required TDS deduction.

The assessee contended that Shri Amit Kumar was an ex-employee who received performance-based salary, not commission, and his total income was below the taxable limit, thus not requiring TDS deduction. The ITAT found that the payment was indeed in the nature of salary and not commission. Since the payment was only Rs. 62,000/- and below the taxable limit, no TDS was required. The ITAT directed the deletion of the disallowance of Rs. 62,000/-.

Conclusion:

The ITAT allowed the appeal of the assessee, deleting both the disallowance of Rs. 20,33,762/- out of commission expenditure and the disallowance of Rs. 62,000/- paid as incentives to the ex-employee due to non-deduction of TDS. The order was pronounced in the open court on 31st January 2019.

---