Disallowance of commission expenses and sundry creditor additions: confirmations sustained and additions deleted on appeal

Disallowance of commission payments was rejected because total commission (circa 2.01% of sales) was found commercially reasonable and documentary confirmations were furnished, therefore the expense disallowance was deleted. Addition of sundry creditors under the unexplained credit provision was held inapplicable because the alleged credits were opening balances with no fresh credits in the year under review; precedent recognising inapplicability where no fresh credits existed was applied and the addition was deleted, resulting in allowance of the appeal on both counts.

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Issues: (i) Whether the disallowance of commission payments treated as bogus by the Assessing Officer for AY 2013-14 and AY 2014-15 should be sustained; (ii) Whether addition under section 68 of the Income-tax Act, 1961 in respect of sundry creditors (opening balances) for AY 2014-15 is sustainable.

Issue (i): Disallowance of commission payments held as bogus by the Assessing Officer for AY 2013-14 and AY 2014-15.

Analysis: The assessee produced confirmations, bank statements, ledger entries, copies of ITRs of recipients and, in some cases, affidavits; payments were made through banking channels with TDS and recipients included the amounts in their returns; majority of similar claims in other cases were accepted by the AO; overall commission was around 2.01% of sales. The Tribunal examined whether these evidences discharged the burden to establish identity and genuineness of commission payments.

Conclusion: The disallowance of the commission payments is deleted and the grounds challenging the disallowance are allowed in favour of the assessee.

Issue (ii): Addition under section 68 of the Income-tax Act, 1961 in respect of sundry creditors (opening balances) for AY 2014-15.

Analysis: Section 68 applies to sums credited in the year under reference. The creditors in question had opening balances and no fresh amounts were credited during the year; no expenditure for these balances was claimed in the P&L for the year; the Tribunal relied on the principle that section 68 cannot be invoked where there is no fresh credit in the year and noted supporting precedent authority to the same effect.

Conclusion: The addition under section 68 in respect of sundry creditors is deleted and the related grounds of appeal are allowed in favour of the assessee.

Final Conclusion: Both appeals for AY 2013-14 and AY 2014-15 are allowed, resulting in deletion of the disallowances and additions challenged by the assessee.

Ratio Decidendi: Where the assessee establishes identity and genuineness of payees by confirmations, banking evidence, TDS and recipients' inclusion in returns, expenditure cannot be disbelieved; and section 68 cannot be applied to alleged credits that are only opening balances where no fresh credit occurred in the relevant year.

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