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April 22, 2022

Expenses of Commission paid on the basis of oral agreement allowed by ITAT

by CA Shivam Jaiswal in Income Tax

Expenses of Commission paid on the basis of oral agreement allowed by ITAT

Fact and Issue of the case

The facts of the case relating to the ground are that during the course of assessment proceedings the Assessing Officer noticed that the assessee had made payment of Rs. 2,74,846/- being commission paid . In response to the query of the Assessing Officer, the assessee had stated that given commission at 0.5% of sales made by him. The Assessing Officer called upon the assessee to furnish any written agreement in this regard. It was stated before the Assessing Officer that there was no such written agreement. The commission was paid purely on the basis of oral agreement. The Assessing Officer did not accept this explanation of the assessee and disallowed the commission expenditure. On appeal to the learned CIT(A), same was confirmed.

Learned counsel for the assessee submitted that the authorities below were not justified in disallowing the claim merely on the basis that there was no written agreement. Learned counsel submitted that the commission was paid for making sales and there was no reason to make a false claim as the payment made to Shri Ishan Batra was also attracted tax at the highest slab. He submitted that it is not a case of evading tax.

Observation of the court

 The observation of the court  to verify the payments, assessee was asked to submit ageing of unsecured loans along with comprehensive chart for the interest payment. The assessee filed his reply  and submitted details pertaining to custom duty along with challans, TDS return in order to substantiate payments made to related parties, and details of sale and purchase to related parties alongwith supporting invoices which have been placed on records. From the perusal of details filed by the assessee, it has come to notice that assessee has made payment in the nature of interest on loan of Rs. 1,70,250/-. A non related party being interest on loan @ 15% on outstanding balance of Rs. 11,35,000/-. However, assessee was asked as to why the payment of interest on loan @ 15% should not be restricted to 12% of the outstanding balance. The assessee was also asked to submit copies of computation of income of the persons to whom payment under section 40A(2)(b) was made. Further, assessee filed his reply vide letter dated 30.11.2017 along with copy of computation of income of the persons to whom interest payments were made. In response to query regarding payment of interest @ 15% . The assessee stated that the said person is not related to partners of the firm in any way. Firm required funds and he was not inclined to provide funds at a rate of less than 15%. However, the submissions offered by the assessee is not found to be tenable and therefore, payment of interest on loan @ 15% is restricted to 12% of outstanding balance and an amount of Rs. 34,050/- is being added to the income of the assessee being difference in the interest amount.

AO has made this disallowance as it was found that payment of Rs. 2,74,846/- was paid to related party as commission payment. Assessee could not filed any agreement entered into for the commission payment and also could not produce any documentary evidence relating to kind of services that were rendered , hence, AO treated this commission payment as not genuine. Even during the appellate proceedings, the appellant vide order sheet entry dated 26/12/2018 was specifically asked to file detailed reply relating to agreement for commission paid and proof of services rendered but it was accepted by the assessee that they did not have any agreement for payment of commission . However, it was contended that he is a chemical engineer and computer saavy person, who is helping in the overall business of the assessee. It was further contended that the payment of commission is not for shifting any income out of the hands of the assessee as Sh. Ishan Batra is also in the tax slab of 30%.

I do not agreed with the contention of the assessee as any payment be if salary or commission, has to be paid based on some agreement or appointment letter. Since assessee does not have any agreement for payment of such commission and as such there is no proof for rendering of any specific services for the benefit of the business, AO is correct in making this disallowance of Rs. 2,74,846/- as payment of commission.


Therefore, in the absence of any independent inquiry by the Assessing Officer on this issue, the addition so made cannot be sustained. The assessee’s appeal is allowed.

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