AO Not Justified In Disallowing Part Of The Commission Payment To Indian Hume Pipe: Bombay High Court

The Bombay High Court has held that the Assessing Officer (AO) was not justified in disallowing part of the commission payment to Indian Hume Pipe.

The bench of Justice G.S. Kulkarni and Justice Jitendra Jain has observed that the mere fact that the assessee, Indian Hume Pipe, establishes the existence of an agreement between him and his agent and the fact of actual payment leaves it to the discretion of an officer to consider whether such expenditure was made exclusively for the purpose of the business. The expenditure incurred must be for commercial expediency. However, in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be adjudged from the businessman's point of view and not from the department’s perspective.

The appellant/assessee is a limited company listed on the stock exchange and is engaged mainly in the business of manufacturing and selling R.C.C. pipes, steel pipes, etc., which are required for water supply and drainage systems.

The assessee paid the commission paid to M/s. Chintambi & Swaminathan, Hyderabad; A. Mohan Menon; and M/s. Manyam Engg. Enterprises, Hyderabad, which was disallowed by the assessee. The Assessing Officer allowed only 1/3 as deductible expenditure and disallowed the balance of 2/3 on the ground that the entire payment cannot be considered laid out wholly and exclusively for the purpose of the business because neither the appellant assessee nor the recipients of the commission could show that orders were procured with their assistance. Therefore, the role of the commission agent is only in respect of follow-up inquiries, and therefore, only 1/3 of the expenditure was considered deductible.

The assessee preferred an appeal to the CIT (A). The Commissioner (Appeals) disposed of the appeal. With respect to the ground relating to the disallowance of commission payment, the Commissioner (Appeals) followed his own order for the assessment year 1985–86 and allowed the whole of the amount that was disallowed by the Assessing Officer.

The department filed an appeal with the tribunal. The department challenged various grounds on which the Commissioner (Appeals) granted relief, including one relating to commission payment.

The tribunal disposed of the appeal. With respect to M/s. Chintambi & Swaminathan and M/s. Manyam Engineering Enterprises relating to the commission payment, the Tribunal restricted disallowances to 2/3rd of the total commission. With respect to A. Mohan Menon, the Tribunal directed to give relief of 1/3rd of the amount of Rs. 1.40 lakhs since the party admitted to having received an amount of Rs. 1.40 lakhs and the assessee has not brought on record any material to explain the discrepancy in the amount shown to have been paid by the appellant assessee of Rs. 1,82,807/- and admitted to have been received by the recipient. With respect to the other remaining parties, the Tribunal confirmed the disallowance made by the Assessing Officer on the ground that the assessee did not furnish any evidence in support of services rendered by these commission agents. The Tribunal observed that there should have been a lot of correspondence between the assessee and the recipient of commission, and in the absence of any evidence, the disallowance made by the Assessing Officer was justified.

The assessee submitted that the payments have been made through banking channels, and there is no allegation that payments made to the commission agent have come back to the appellant. The appellant further submitted that the nature of the services is such that there would not be any documentary evidence to support them.

The department contended that the assessee has failed to furnish any evidence to show that services have been rendered, and therefore, the Assessing Officer was justified in disallowing the commission.

The court found that there was no allegation made in the assessment order of any flowback of the commission payment by the commission agent to the assessee, nor was it contended. The commission agents have confirmed the receipt of the commission. The payments have been made through banking channels. Therefore, even on this account, the genuineness of the payment cannot be doubted.

The court held that the finding of the officer and the tribunal for disallowing part of the commission payment was not justified.

Case Title: The Indian Hume Pipe Co. Ltd. Versus Commissioner of Income Tax

Case No.: Income Tax Appeal No.744 Of 2002

Date: 31/08/2023

Counsel For Petitioner: S.Sriram

Counsel For Respondent: Suresh Kumar

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