[S. 37 IT Act] Ori HC | The reasonableness of the expenditure had to be adjudged from the point of view of the businessman; Applied the test of commercial expediency

Orissa High Court: A Division Bench of S. Muralidhar CJ and R. K. Pattanaik J. dismissed the appeal filed by the assessee and upheld AO’s decision to disallow part of the payment towards commission.

The background facts are that the Appellant during the AY in question was engaged in the business of manufacturing and sale of P.P. woven sacks meant for packing of fertilizer and cement etc. It filed its return of income and while examining the claims, the AO raised a query regarding payment of commission and asked the Appellant to justify it. It was claimed that the commission was entirely paid through banking channels after deducting Tax at Source (TDS). Each of the commission agents had disclosed the said commission amount in their respective returns and paid tax thereon. In the assessment order dated 8-03-2013, the AO partly allowed the commission expenses to the tune of Rs.23,41,245/- and disallowed Rs.30,08,545/- which was then added to the returned income of the Appellant. The Appellant filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] which was dismissed as the persons to whom the commission was paid were Directors of the appellant or the relatives of such Directors. Thereafter, the Appellant went before ITAT. The Appellant failed to bring on record their expertise to render services and also what services had in fact been rendered to enhance the business of the Appellant. Merely because TDS had been deducted, would not justify allowing the entire amount as claimed towards commission. Accordingly, the appeal was dismissed, and the instant appeal was filed.

Counsel for the appellants Mr. RP Kar submitted that the commission paid could not be termed as excessive or unreasonable and had been duly accounted for. He insisted that with the TDS having been deducted at the time of paying such commission, and with the recipients of commission having disclosed it in their respective tax returns and having paid tax thereon, again subjecting such payment at the hands of the Appellant would amount to double taxation, which is impermissible in law.

Counsel for respondents Mr. RS Chimanka and A Kedia submitted that the concurrent orders of the AO, the CIT (A) and the ITAT and submits that they call for no interference.

The Court observed that in the given case claiming that each of the seven persons to whom commission was paid actually had the expertise to help the Appellant procuring the IOF from different sources appears to be stretching things a bit too far, and hence the AO appears to be justified in disallowing the commission insofar as it was paid to the said seven persons.

The Court relied on J.K. Woollen Manufacturing v. Commissioner of Income Tax (1969) 72 ITR 612 (SC) and observed that there was the test of commercial expediency. In other words, whether the payment made to the General Manager of the company as commission was an expenditure wholly and exclusively for the purpose of the business? It was concluded that the reasonableness of the expenditure had to be adjudged from the point of view of the businessman and not the Income Tax Department. In the circumstances, the entire amount paid to the General Manager as commission was allowed as expenditure.

The Court observed that all the persons to whom commission was paid were either Directors of the Company or their relatives. None of them is shown to have any expertise in procuring IOF from the Indian markets for enabling the Appellant to meet the purchase order placed on it for IOF. The amounts paid as commission were also not insubstantial. Even from the point of view of a businessman, it does appear to this Court that the commission amount which was disallowed by the AO cannot be said to be for the purpose of business of the Appellant.

The Court held “Thus, it cannot be said that the AO’s decision to disallow part of the payment towards commission was unreasonably arrived at.” [Oripol Industries Ltd. v. Joint Commissioner of IT, ITA No.41 of 2017, decided on 12-05-2022]


Arunima Bose, Editorial Assistant ahs reported this brief.

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