2019 (11) TMI 1300 - AT - Income Tax

Tribunal overturns assessment, stresses need for clear evidence in profit estimation and commission disallowance

The Tribunal allowed the appeal, directing the deletion of additions related to the estimation of gross profit and excess commission disallowance. It ... Estimation of gross profit - HELD THAT:- A.O. did not verify the fact of cash discounts, which as per the assessee was one of the reason for variance of profit at Indore and Ujjain respectively. Further, the A.O. also failed to make independent enquiry from the market at Indore and Ujjain. It is settled principle of law that the estimation of profit should be made after considering the factors that influenced the profit. In a given market condition, if competition is high, the natural consequence would be lower profit margins and where there is no such competition, naturally the traders would fetch desired margins. This is the reason why it is expected from the A.O. that he should consider the factor that might influence the margins before making a fair estimation of the profit. A.O. did not make necessary enquiry, which would have enabled him to make a fair estimation of profit. Hence, action of the A.O. cannot be sustained. A.O. is therefore directed to delete the addition. Disallowance of excess commission - HELD THAT:- Admittedly, payment of commission is not treated as a bogus. The A.O. has not brought any adverse material suggesting that the commission was not paid or payment so made was received back by the assessee. It is also not the case that the payments have been made to the related parties. The decision in respect of quantum of commission to be paid would certainly be an issue to be decided by the business men. There is no law regulating the payment of commission or restricting the payment of commission by trader to its dealers. Merely because manufacturing company is not making payment of commission to the assessee cannot be the sole ground for disallowing the claim of expenditure related to payment of commission. At same time, the business men, to have a dominant position in market, makes such kind of commission or discounts, which is not prohibited by any law. It is the businessmen who can decide that what percentage of commission is required to be paid considering the commercial expediency. In the absence of material, merely a statement is made that assessee made excessive commission to reduce its tax liability which is not sufficient to reject claim of the assessee - Decided in favour of assessee. Issues:1. Estimation of gross profit for Indore Branch compared to Ujjain Head Office.2. Disallowance of excess commission paid by Indore Branch.Estimation of Gross Profit:The appeal was against the CIT(A) order for the assessment year 1999-2000, challenging the addition of Rs. 4,29,234 for low gross profit in the Indore Branch compared to the Ujjain Head Office. The A.O. estimated profit without rejecting the books of accounts, leading to the appeal. The Tribunal emphasized that the A.O. must have clear findings based on evidence before estimating profit. The A.O. failed to consider factors like cash discounts and market conditions influencing profit margins in Indore and Ujjain. The Tribunal concluded that the A.O.'s estimation lacked proper enquiry and directed deletion of the addition.Excess Commission Disallowance:The A.O. disallowed the commission paid by the Indore Branch without proper verification, solely based on the difference in commission paid at Ujjain and Indore. The Tribunal noted that there was no adverse material to contradict the claim of the assessee. It highlighted that the A.O. should have made a definite conclusion about the commission payment and should have considered commercial expediency. The Tribunal found the disallowance was based on conjectures and directed the A.O. to delete the addition. It emphasized that the business decision on commission payments should not be solely grounds for disallowance without concrete evidence.The Tribunal allowed the appeal, directing the deletion of both additions related to the estimation of gross profit and excess commission disallowance, emphasizing the need for proper findings and evidence before making such adjustments.