2025 (9) TMI 1430 - AT - Income Tax

Wholesale commission disallowance partially set aside; 15% addition for missing payee IDs, remainder of Rs.75.49L deleted

ITAT (Surat) held the AO's wholesale disallowance of commission expenses was excessive and partly allowed the appeal. The tribunal found the assessee ... Disallowance of commission expense - AO made the disallowance on the ground that during the assessment proceedings, the appellant failed to furnish the details of commission expenses - HELD THAT:- As seen that during the appellate proceedings before the CIT(A), the appellant had furnished the complete details i.e., confirmation of account with identity proof of various parties. As these details were not filed before the AO, CIT(A) called for a remand report from the AO, but he did not submit any comment or objection on these evidences. Appellant had filed confirmation of account of all parties and proof of identities (PAN and Aadhar card) of most of the parties to whom commission payments were made. Such commission expenditure is a regular feature of the assessee’s business and the same has been regularly claimed in the return of income filed for various year There is not much variation in the ratio of commission expenditure for the year under considerations with those with the other assessment years. It is also seen that scrutiny assessment u/s 143(3) for AY 2020-21 was made on 06.09.2022 and the commission expenditure claimed by the assessee was accepted as genuine. CIT (A) while confirming the addition observed that the appellant did not specify as to why TDS was not made from the commission payment - AR pointed out that there is no requirement for making TDS in case of the appellant, an individual, as the said liability arises only if the accounts of the appellant are required to be audited u/s 44AB for the immediately preceding AY. However, there was no such liability to get the accounts audited in case the appellant for immediately preceding AY 2015-16 as the total turnover was Rs. 66,88,803/-, which was below the prescribed limit. This is evident from the figure of turnover mentioned in the return of income filed for the preceding year. Appellant did not file agreements with the parties to whom the commission had been paid for more than Rs 1 lakh cannot be a ground for making the impugned disallowance considering the nature of business of the appellant and also considering the facts that the appellant made payment through account payee cheques supported by the confirmation of the accounts and identity proof of the parties. These evidences filed during appellate proceedings were forwarded to the AO by the CIT(A) but the AO did not reject the evidences nor raised any objection. If he was not satisfied, he could have made independent inquiry as per law including by issue of notices u/s 133(6) of the Act. However, he did not raise any objection in this regard. On the other hand, the Revenue has accepted commission expenses incurred in AY 2020-21 after issuing notices u/s 133(6) to the persons to whom commission were paid. The order u/s 143(3) r.w.s. 144B of the Act for AY 2020- 21 was passed on 06.09.2022 accepting the returned income of Rs. 44,24,590/- declared by the appellant. Thus, genuineness of commission expenditure was accepted in AY 2020-21. No reason for disallowing the entire commission expenses. However, we find that the appellant has not submitted identity proof of some of the recipients though all payments were made through banking channels. Therefore, it would be reasonable if 15% of the commission expense is disallowed to avoid possible leakage of revenue. The AO is accordingly directed to add Rs. 13,32,283/- and delete the remaining addition of Rs. 75,49,603/-. The ground of assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether commission payments of Rs. 88,81,886 claimed as business expenditure are deductible where details and agreements with payees were not furnished during assessment proceedings but were furnished before the appellate authority. 2. Whether failure to deduct TDS by the assessee on commission payments justifies disallowance where the assessee contends there was no TDS liability because accounts were not required to be audited u/s 44AB for the immediately preceding year. 3. Whether entire commission expenditure can be disallowed where payments are made through banking channels and ledger confirmations, PAN/Aadhaar and other identity proofs of several payees are produced at the appellate stage, but some identity proofs remain missing for certain recipients. 4. What is the appropriate relief when the Assessing Officer did not comment on or object to evidences produced before the Commissioner (Appeals) and did not file a remand report or make independent enquiries u/s 133(6) despite being forwarded such evidences? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of commission payments where supporting details were not furnished to the AO but produced before the Appellate Authority Legal framework: Allowability of business expenses is governed by relevant provisions of the Income-tax Act; burden lies on assessee to prove genuineness of expenditure. Appellate authorities may consider additional evidence subject to compliance with principles of natural justice and on merit. Precedent Treatment: No specific judicial precedents are cited in the judgment; approach followed is consistent with the principle that appellate authority can admit and consider evidence not before AO if AO is afforded opportunity to comment or remand is sought. Interpretation and reasoning: The Tribunal noted that the assessee furnished complete details (ledger confirmations, bank statements, identification documents) during appellate proceedings and these were forwarded to the AO. The AO did not submit comments or objections nor produced a remand report. The Tribunal treated the absence of AO's objections as acceptance of the evidentiary sufficiency and noted regularity of commission expenditure across assessment years and acceptance of similar expenditure in AY 2020-21. Ratio vs. Obiter: Ratio - Appellate authority (and Tribunal) may allow commission expenditure where credible evidence of payment and business nexus is produced at appellate stage and the AO, when given opportunity, does not controvert or file remand report. Conclusion: Entire commission payments cannot be disallowed merely because details were not produced during assessment if materially convincing evidence is furnished on appeal and AO fails to controvert the same. Issue 2 - TDS non-deduction as ground for disallowance Legal framework: Liability to deduct TDS depends on statutory thresholds and, for individuals, may be linked to whether accounts require audit u/s 44AB. Non-deduction of TDS can attract disallowance or penalty where statutory obligation to deduct exists. Precedent Treatment: No precedents cited; Tribunal applied statutory interpretation of TDS liability vis-à-vis audit requirement for individuals. Interpretation and reasoning: The assessee demonstrated that turnover in the immediately preceding year was below the threshold for audit u/s 44AB (turnover Rs. 66,88,803), thus contending no obligation to deduct TDS. The Tribunal accepted the assessee's contention on facts presented (return figures) and held that absence of TDS deduction alone was not a valid ground for disallowance where no statutory obligation to deduct existed. Ratio vs. Obiter: Ratio - Non-deduction of TDS does not automatically justify disallowance if statutory obligation to deduct TDS was absent. Conclusion: CIT(A)'s observation that TDS non-deduction warranted disallowance was misplaced on facts where no 44AB audit obligation existed for the immediately preceding year; therefore, TDS non-deduction did not justify disallowance in this case. Issue 3 - Requirement of agreements/invoices and partial absence of identity proof for certain payees Legal framework: Genuineness and identity of payees are relevant to allowability; documentary proof such as agreements/invoices strengthens claim. Payments through banking channel, ledger confirmations and identity proofs are significant indicia of genuineness. Precedent Treatment: No explicit overruling or distinction of precedent; Tribunal relied on evidentiary assessment and commercial reality of particular DSA business model. Interpretation and reasoning: Tribunal recognized the nature of DSA business where channel agents/referral agents are engaged and concluded that requirement of formal agreements for every payee (including those above Rs.1 lakh) is not conclusive ground for disallowance given (i) payments made by account payee cheques, (ii) ledger confirmations, (iii) PAN/Aadhaar for most payees, and (iv) acceptance of similar expenses in other years. However, because identity proof for some recipients was not produced, Tribunal considered a measured adjustment to prevent possible revenue leakage. Ratio vs. Obiter: Ratio - Where substantial corroborative evidence exists (banking entries, confirmations, identity proofs), rigid insistence on formal agreements/invoices for every payee is not necessary; but absence of identity proof for some recipients may justify proportionate disallowance. Conclusion: Full disallowance is not warranted; a proportionate disallowance is appropriate to account for missing identity proofs. Issue 4 - Effect of AO's failure to respond to evidences forwarded by CIT(A) and to conduct enquiries u/s 133(6) Legal framework: Assessing Officer has statutory powers to make inquiries including u/s 133(6) and to file remand reports when appellate authority seeks it; failure to exercise these powers may affect weight of AO's earlier objections. Precedent Treatment: No precedents cited; Tribunal applied principles of fair adjudication and duty of AO to examine evidence. Interpretation and reasoning: The Tribunal placed significance on AO's inaction: no remand report and no objections despite evidences being forwarded. It noted that AO could have conducted independent enquiries but did not; Revenue subsequently accepted similar expenses in a later assessment year after issuing u/s 133(6) notices. This conduct supported the genuineness of expenses and mitigated AO's earlier disallowance. Ratio vs. Obiter: Ratio - AO's failure to respond to evidentiary material when afforded opportunity weakens the basis for sustaining disallowance on assessment record. Conclusion: Inaction by AO when given opportunity to comment is a material factor in allowing expenses claimed on appeal, subject to any remaining lacunae in proof. Final Disposition and Direction Applying the above analysis, the Tribunal partially allowed the appeal: it deleted Rs. 75,49,603 of the disallowance and directed addition of Rs. 13,32,283 (15% of commission expenses) to account for missing identity proofs, thereby balancing prevention of revenue leakage with recognition of substantive evidence of genuineness.