Commission Paid To Persons Who Are Not Beneficial To Business Of Assessee Is Taxable

Case Title:
M/s. Oripol Industries Ltd., Balasore Vs. Joint Commissioner of Income Tax

Date:
12.05.2022

Bench:
Justice R.K PATTANAIK

Parties:
Appellant – M/s. Oripol Industries Ltd. Balasore
Respondent – Joint Commissioner of Income Tax

Subject

An appeal was filed against the order passed by the Income Tax Appellate Tribunal (ITAT) which disallowed the commission expenses made by the appellant during the course of his business.

Important Provisions

Section 37 of Income Tax Act – This section talks about the expenses which are disallowed while filing Income Tax Returns.

Overview

• The Appellant was conducting a business of manufacturing and sale of woven sacks used for packing of fertilizers, cements and so on.
• The appellant had declared a total income of Rs. 1,47,09,311/- on 10th September, 2010. The return was picked up for scrutiny and a notice was sent by the Assessing officer (AO) to the appellant.
• The appellant was asked a query by the AO regarding the payment of commission which amounted to an amount of Rs. 53,49,790/-.
• The appellant stated that the payment of commission was made to the Directors of the Company and his relatives since they had obtained a time bound Iron Ore Fines (IOF) order wherein the materials could not be obtained without their help. The commissions were paid through banking channels after deducting Tax at Source (TDS).
• The AO after an assessment had partly allowed the expenses which amounted to Rs. 23,41,245/- and disallowed Rs. 30,08,545/-. The appellant then went for an appeal before the Commissioner of Income Tax which was later dismissed.
• The appellant then went before the Income Tax Appellate Tribunal (ITAT) which showed that the appellant had failed to bring the expertise of directors of the company and his relatives on record. Mere filing of TDS would not justify the entire amount to be claimed as commission and therefore his appeal was dismissed.

Issues raised

1. Whether the commission paid by the appellant was taxable?
2. Whether the commission expense disallowed by the AO with respect to Section 37 of the Income Tax Act was justifiable?

Advancements made by the appellant

The learned counsel for the appellant relied upon the case of JK Woollen Manufacturing Vs. Commissioner of Income Tax and stated that if the TDS was deducted and the respective tax returns are disclosed then subjecting the appellant to pay again would amount to double taxation.

Judgment Analysis

• The court observed that the Supply of IOF done by the appellant was not in line of their usual business.
• The appellant could not define the expertise of the directors of the company and his relatives in procuring IOF from the markets.
• In the case of JK Woollen Manufacturing Vs. Commissioner of Income Tax the commission amount was taken as expenditure supported by commercial expediency, whereas, in the current scenario the appellant was not able to prove the expertise in procuring the IOF to justify that the amount was for the purpose of the business of the appellant.

Conclusion

The court concluded that with the test of commercial expediency it was confirmed that the amount which was disallowed by the AO cannot be established that it was for the purpose of business of the appellant. Thereby, the appeal was dismissed and the court was in favour of the department and the partly allowance of the commission expense by the AO was said to be justified with respect to Section 37 of the Income Tax Act.

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