2020 (3) TMI 170 - AT - Income Tax

Assessee's commission payment for 'client referral' lacking evidence overturned in favor of Revenue.

The Tribunal found that the assessee did not provide sufficient evidence to support the purpose of the commission payment to M/s. Divine Alloys and Power ... Allowability of commission as business expenditure - burden of proof on the assessee to show expenditure incurred wholly and exclusively for business - client referral commission - requirement of tangible evidence - agreement and proof of services - reversal of appellate order and restoration of assessing officer's findingAllowability of commission as business expenditure - burden of proof on the assessee to show expenditure incurred wholly and exclusively for business - client referral commission - requirement of tangible evidence - agreement and proof of services - Whether the commission of Rs. 3,98,79,140/- paid to M/s. Divine Alloys and Power Company Limited as 'client referral' is an allowable business expenditure for AY 2012-13. - HELD THAT: - The Tribunal found that the assessee failed to discharge the onus of proving that the payment constituted an expenditure wholly and exclusively for business. The assessee did not produce any agreement with the payee or contemporaneous communications specifying services rendered; the payee's response confirming receipt did not explain the nature or particulars of services. Though the assessee alleged 'referral' leading to a one year spike in turnover, the materials showed that the engagement arose on the advice of M/s. Elecon Engineering and that there was no evidence of direct referrals by the payee to substantiate the claimed commission. The absence of adequate supporting bills or demonstrated linkage between the alleged referral and the increased turnover, together with the transient nature of the transactions, led the Tribunal to conclude the purpose and business nexus of the payment were unproved. For these reasons the CIT(A)'s allowance was unsustainable. [Paras 7, 8, 9, 10, 11]The disallowance made by the Assessing Officer is restored; the claimed commission is not allowable for AY 2012-13.Final Conclusion: The Revenue's appeal is allowed; the CIT(A)'s deletion of the disallowance is reversed and the assessing officer's order disallowing the commission is restored for Assessment Year 2012-13. Issues:Appeal against deletion of disallowance of commission paid to M/s. Divine Alloys and Power Company Limited for 'client referral'.Analysis:The Revenue appealed against the deletion of disallowance of commission paid to M/s. Divine Alloys and Power Company Limited for 'client referral' by the learned Commissioner of Income Tax (Appeals). The Revenue argued that the assessee failed to prove the expenditure was incurred wholly and exclusively for business purposes as no agreement or evidence of services rendered was provided. The Assessing Officer disallowed the claimed commission due to lack of proof, which the CIT(A) overturned. The Revenue contended that the order should be reversed, citing the need for proof of services rendered and expenditure purpose.The Departmental Representative relied on the Supreme Court decisions in Umakant B. Agarwal and Lachminarayan Madan Lal cases to support their argument. On the other hand, the Authorized Representative for the Assessee claimed that the commission was for 'referral business' and led to a substantial increase in turnover. They cited the decision in Commissioner of Income Tax vs. Speciality Paper Company to support the deduction of commission payment. They argued that the Revenue's cited cases did not apply as the expenditure was proven in this case.Upon reviewing the submissions, the Tribunal found that the assessee engaged M/s. Divine Alloys and Power Company Limited based on advice from M/s. Elecon Engineering, not for direct client referral. The turnover increase was attributed to the assessee's efforts, not due to services of M/s. Divine Alloys and Power Company Limited. The Tribunal noted the lack of communication or evidence of services provided by M/s. Divine Alloys and Power Company Limited, casting doubt on the purpose of the commission payment.The Tribunal concluded that the assessee failed to substantiate the purpose of the commission payment to M/s. Divine Alloys and Power Company Limited for 'client referral.' As a result, the order of the CIT(A) was reversed, and that of the Assessing Officer was restored. The appeal of the Revenue was allowed, with no other issues argued or discussed during the proceedings.