2025 (2) TMI 1253 - AT - Income Tax

Deletion of commission disallowance for 16 parties upheld; Section 14A/Rule 8D addition deleted; foreign transaction remitted to AO

Jay Chemical Industries Pvt. Ltd. Versus The Dy. CIT, Circle-2 (1) (1), Ahmedabad And (Vice-Versa)

ITAT upheld deletion of disallowance for commission payments to 16 long-standing parties and confirmed deletion of the Section 14A/Rule 8D addition on the ... Disallowance of commission paid to non-residents - HELD THAT:- AO is directed to delete the disallowance w.r.t. commission payment made to the above mentioned 16 parties which are old parties. Addition on account of disallowance u/s. 14A r.w.r. 8D - Findings of the Ld. CIT(A) that there is no dividend income earned by the assessee thereby deleted the addition are correct. CIT(A) has considered that the amended provisions of Section 14A will be applicable prospectively and relied upon various case laws. Therefore the order passed by the Ld. CIT(A) does not require any interference. Disallowance of commission paid to M/s. Altoteks Tekstil, Turkey - assessee claims it has been wrongly mentioned as commission payment to Altoteks Tekstil. Whereas the transaction was actually in the nature of direct sale to the foreign party - Counsel filed a compilation of whereas Ledger Account of M/s. Altoteks Tekstil, Copy of Invoices, Credit Notes and Form No. 15CA and 15CB filed by the Chartered Accountant are placed on record which were very much available before the lower authorities. CIT(A) held that no documents are produced to substantiate the claim made by the assessee. Therefore in the Interest of Justice, we deem it fit to set aside the issue back to the file of Assessing Officer to verify the above documents. Addition on account of Consultancy Charges deleted. See Roop Kumar vs. Mohan Thedani [2003 (4) TMI 565 - SUPREME COURT] ISSUES PRESENTED AND CONSIDERED 1. Whether commission payments made to non-resident foreign agents are deductible under section 37 and not liable to disallowance under section 40(a)(ia) when identical payments to the same agents were accepted in earlier assessment years and there are no divergent facts in the year under consideration. 2. Whether disallowance under section 14A read with Rule 8D is warranted where the assessee claims no exempt income (no dividend received) for the year and the claim is verifiable from the filed ITR; and whether amendments to section 14A by Finance Act, 2022 apply retrospectively or prospectively for the year in issue. 3. Whether an amount characterized as commission but asserted by the taxpayer to be a discount (direct sale reduction) is allowable as business expenditure where supporting documents (invoices, credit notes, ledger, 15CA/15CB) exist but were not accepted by the assessing authority / first appellate authority. 4. Whether additional evidence filed at the appellate stage to substantiate previously agreed additions (consultancy charges) may be admitted and lead to deletion where the Assessing Officer in a remand report does not dispute the substantiation. ISSUE-WISE DETAILED ANALYSIS Issue 1: Deductibility of commissions paid to non-residents; interplay of section 37 and section 40(a)(ia) where identical payments were accepted in earlier years Legal framework: Section 37 permits deduction of business expenditure not falling under specific disallowance provisions; section 40(a)(ia) disallows certain payments to non-residents if tax is not deducted at source as required. Principles of precedent and consistency in successive assessment years inform treatment where facts are identical. Precedent Treatment: The Tribunal/First Appellate Authority and High Court decisions in the assessee's own earlier years held in favour of the assessee on both section 37 and section 40(a)(ia) issues after detailed examination of evidences (credit notes, payment details, emails, etc.). Those earlier decisions were followed by the CIT(A) for the present year in respect of 16 of 19 agents and those decisions were treated as binding for identical facts. Interpretation and reasoning: The Court noted that for 16 agents the facts and evidentiary matrix were not divergent from earlier years where the same payments were accepted; the Assessing Officer did not bring any contrary material to show presence of permanent establishment or business connection in India for those foreign agents. In absence of divergent factors, and given binding adverse/pro-assessee precedents in the assessee's own cases, the appellate direction to delete the disallowances was appropriate. For the remaining three agents, the appellate authority had sustained disallowance with reasons; those were treated separately. Ratio vs. Obiter: Ratio - where identical transactions and evidence are present across assessment years and prior appellate/HC/Tribunal rulings in the assessee's own case have accepted deductibility and non-application of section 40(a)(ia), the same conclusion applies unless divergent facts/new material is shown. Obiter - general observations on the need to establish permanent establishment or business connection were ancillary but consistent with ratio. Conclusions: Deletion of disallowance in respect of commission payments for the 16 old foreign agents is justified and sustained; Revenue's ground challenging the deletion is dismissed. Disallowance for the remaining three agents (aggregate amount specified) stands as upheld by the lower authority. Issue 2: Applicability of section 14A read with Rule 8D where no exempt income is earned; prospective vs retrospective effect of Finance Act, 2022 amendment Legal framework: Section 14A deals with expenditure incurred to earn exempt income and Rule 8D prescribes computation methodology for disallowance. The statutory amendment introduced by Finance Act, 2022 altered computation and raised questions as to retrospective or prospective applicability. Precedent Treatment: Conflicting judicial pronouncements exist - some Tribunals/High Courts have held the 2022 amendment to be retrospective, while other High Court/Tribunal decisions have held it prospective. The CIT(A) followed binding decisions of the High Court in the assessee's own cases and other relevant authorities holding non-application where no exempt income (dividend) was received in the year. Interpretation and reasoning: The appellate authority observed that the assessee had not received any dividend or other exempt income in the financial year under consideration; therefore, prima facie section 14A would not apply. The deletion was made subject to verification from the filed ITR that no exempt income was reported. Given absence of dividend and lack of contrary material, the appellate deletion was sustained. On the temporal effect of the 2022 amendment, the Court noted divergence in judicial views and that the CIT(A) correctly relied on precedent favourable to the assessee for the year in issue. Ratio vs. Obiter: Ratio - where no exempt income is earned in the relevant year, disallowance under section 14A/Rule 8D is not warranted; subject to verification from filed ITR. Obiter - discussion of judicial conflict on retrospective/prospective effect of the 2022 amendment is illustrative and not decisive for the facts of the year under consideration. Conclusions: Deletion of section 14A disallowance (Rs.10,84,214) is upheld conditional on verification that no exempt income was reported in the ITR. Revenue's challenge is dismissed. Issue 3: Characterization of a payment as commission versus discount on direct sale - admissibility of documentary evidence produced at Tribunal and remand to Assessing Officer Legal framework: Deduction for business expenditure requires relevant supporting documentation to prove the nature and genuineness of the expense (invoices, credit notes, ledger entries, Form 15CA/15CB for payments to non-residents). Appellate authorities assess sufficiency and probative value of such documentation. Precedent Treatment: The CIT(A) denied the claim on the ground that the assessee merely asserted the amount to be a discount without furnishing specific supporting details. The Tribunal observed that relevant documents (ledger, invoices, credit notes, 15CA/15CB) were placed on record before lower authorities and were before the Tribunal in an 18-page paper book. Interpretation and reasoning: Given that documentary proof was available but the CIT(A) found no substantiation, the Tribunal deemed it appropriate in the interests of justice to remit the issue to the Assessing Officer for verification of the documents and to allow the claim in accordance with law after affording opportunity of hearing. The Tribunal did not itself decide the merits on the documentary record but provided for fact-finding by the assessing authority. Ratio vs. Obiter: Ratio - where documentary evidence relevant to the characterization of a payment exists and was not adequately considered by the first appellate authority, remand for verification and opportunity to the assessee is appropriate. Obiter - comments on what specific evidence would conclusively establish discount versus commission are not made. Conclusions: The addition of Rs.7,94,113 disallowing the amount characterized by the assessee as discount is set aside and remanded to the Assessing Officer for verification of the supplied documents and decision in accordance with law; the ground is partly allowed. Issue 4: Admission of additional evidence at appellate stage and deletion of agreed addition (consultancy charges) where remand report does not dispute the evidence Legal framework: Principles permit an appellate authority to admit additional evidence in appropriate circumstances; concessions made during assessment proceedings may be resiled from in rare cases where concession was based on wrong appreciation of law or leads to gross injustice. Supreme Court principles allow resiling in rare/appropriate cases but do not permit disputing the recorded fact of concession. Precedent Treatment: The CIT(A) relied on a Bombay High Court authority restricting the appellate tribunal's jurisdiction to entertain additional grounds where the assessee had agreed to the addition during assessment. The Tribunal distinguished that authority on facts because the assessee had filed additional evidence in support of the agreed addition and the Assessing Officer's remand report acknowledged parity and did not dispute the substantiation. Interpretation and reasoning: Applying Supreme Court precedent, the Tribunal observed that a party may resile from a concession in rare cases when concession was made on wrong appreciation of law or leads to gross injustice. Here, the additional documentary evidence corroborated the expenditure and the Assessing Officer in remand did not dispute its authenticity; accordingly, the Tribunal found deletion warranted. The Tribunal treated the earlier concession as susceptible to resiling given the evidence and lack of AO's adverse comment. Ratio vs. Obiter: Ratio - appellate admission of additional evidence and rescinding an earlier concession is permissible where such evidence demonstrates that the addition is unsustainable and the Assessing Officer does not contest the evidence on remand. Obiter - general admonitions about sitting on the fence and procedural propriety are reiterative of established principles. Conclusions: The consultancy charges addition (Rs.2,80,900) is deleted; the appellate authority properly admitted and relied on additional evidence and the remand report that did not dispute the substantiation.