By TIOL News Service

CHENNAI, JAN 04, 2016: THE issue is - Whether the assessee can be held liable for the sub agents, if any, nominated by the commission agents, who had received the payments of commission. NO is the answer.

Facts of the case

The assessee is engaged in the dealership and distribution of various industrial chemicals, which are being used in the textile industry. The assessment was also completed disallowing the claim for deduction of commission, as expenditure paid to D.D.Vyas, Proprietor of M/s.Shree Narottam Agencies, Srinivas Vyas, Proprietor of M/s.Pushpak Sales Corporation and Manohar Vyas, Proprietor of M/s.Srinivasa Enterprises. The AO concluded in the assessment that no services had been rendered by the agent, for the payment of the commission. Such a finding was based on the survey conducted in the case of D.D.Vyas. On being satisfied that the assessee firm had concealed the particulars of its income and had furnished inaccurate particulars of such income, by claiming false expenditure, the AO levied penalty u/s 271(1)(c). On appeal, the CIT(A) held that the commission payments made to D.D.Vyas and his sons could not be treated as false or inaccurate particulars.

Having heard the parties, the High Court held that,

++ it is noted from the order of the CIT(A), that the assessee had been dealing in distribution of various industrial chemicals during the relevant financial years. The manpower employed by the assessee was too small to handle the distribution work, when compared to the total volume of the business and the areas to be covered. Hence, the assessee firm had been engaging several commission agents to identify the customers, booking orders, recovering the dues etc. All the commission payments made to the Commission agents, by the assessee, except the payments made to D.D.Vyas and his sons had been found to be genuine and therefore, allowed by the AO. It had also been found by the CIT(A) that, in the survey conducted u/s 133A, the receipts of commission from the assessee, by D.D.Vyas and his sons, had not been examined. The disallowance of commission payments to the concerns of D.D.Vyas and his sons had been made only on the presumption that the amounts paid to the sub agents were not genuine in nature. The receipts of commission in the hands of D.D.Vyas and sons had not been questioned. In fact, the receipts of commission by D.D.Vyas and his sons, from the assessee, had been assessed to tax. From the ledger extract, it could be noted that the commission payments to D.D.Vyas and sons were at regular intervals, during the relevant financial years. The commission payments had been made by way of cheques and there was no evidence on record, furnished by the department, to show that the commission paid to D.D.Vyas and his sons had been received back, by the assessee or by anyone operating on its behalf;

++ from the facts available, it could be seen that the department had not shown anything to prove that the assessee had not incurred expenses, by way of payments of commission to D.D.Vyas and his sons. The disallowance was only on the ground that the sub-commissions claimed to have been paid by D.D.Vyas and his sons, to their sub-agents, were not genuine in nature. Based on the decision of the Supreme Court, in CIT Vs. Reliance Petroproducts Private Limited, it had been held that mere claim of deduction will not automatically attract a penalty u/s 271(1)(c). It had also been held that mere failure of an assessee to explain satisfactorily the amounts shown as expenditure would not lead to imposition of the penalty, unless there are some materials to prove that the claim was false, as held by ITAT. The allegation made by the department that the subagents were tea stall owners and soap sellers, who had been introduced by D.D.Vyas and his sons, for the purpose of opening of bank accounts, cannot be put against the assessee. The assessee cannot be held to be liable for the sub agents, if any, nominated by the Commission agents, who had received the payments of commission. The department had failed to discharge the onus of proving that the assessee had made false claims, wilfully, or had furnished inaccurate particulars, while claiming deductions on the payment of commission. We find that the Tribunal had given proper reasons for dismissing the appeals, confirming the order passed by the CIT(A), holding that no specific error could be pointed out in the order passed by the CIT(A). The Tribunal had also observed that the payment of commission in question had been made, by way of cheques and the recipient of the commission had been assessed to tax. Only the deductibility of the payments was found to be not tenable for want of evidence to establish that the payments had been made wholly and exclusively, for the purpose of the business of the assessee. In such circumstances, we do not find any merit in the appeals filed by the Revenue.

(See 2016-TIOL-14-HC-MAD-IT)