ECONOMICAL LIFE FREEDOM PVT LTD,THANE vs. ITO, WARD 1(2), THANE, THANE

The assessee is a company engaged in the business of trading in health cards, magnetic bracelets and gas safety products. Under its business model, membership is given to purchasers and commission is paid to members on referrals at different levels. The assessee filed its return of income on 16.10.2016 declaring total income of Rs.4,41,770/-. The case was selected for limited scrutiny under CASS, inter alia, on account of large commission expenditure and low net profit. During the relevant year, the assessee debited commission expenditure of Rs.68,83,823/-. During the assessment proceedings, the assessee furnished a list of 528 persons to whom commission was stated to have been paid. The assessment order itself records that in 80 cases, TDS was deducted on commission aggregating to Rs.55,42,604/-, whereas in the remaining cases no TDS was deducted on the ground that individual payments were below the applicable threshold. The assessee also explained its referral- based business model. The Ld. AO, however, observed that complete party- wise evidence linking the commission with individual referrals and confirmations from all the recipients had not been furnished. The Ld. AO further observed that only four confirmations had been filed and held that payment through banking channels and deduction of TDS, by themselves, were insufficient to establish the entire claim. Accordingly, without identifying any particular commission payment as non-genuine, the Ld. AO estimated a disallowance at 30% of Rs.68,83,823/-, amounting to Rs.20,65,147/-, observing that commission in the multi-marketing sector would normally be around 20% to 25% whereas the assessee's commission expenditure represented 35.42% of sales. The total income was consequently assessed at Rs.25,06,920/-.

The Ld. AR submitted that the authorities below have erred in sustaining an ad hoc disallowance of 30% of the commission expenditure despite substantial documentary evidence being available on record. The Ld. AR submitted that the assessee has filed before the Bench a paper book comprising pages 1 to 119. The Ld. AR specifically drew our attention to APB pages 07 to 21, containing the details/list of commission payments in respect of the recipients from whose commission TDS was deducted, together with their PAN particulars and Form No.26Q. It was submitted that these documents establish the identity of the recipients as well as the fact of deduction and reporting of tax at source.

The Ld. AR further drew our attention to APB pages 76 to 90, being the copy of the assessee's letter dated 23.07.2018 submitted before the Ld. AO, along with the details of the total commission payments. Thus, according to the Ld. AR, the observation that the assessee had not furnished details of the commission recipients is contrary to the documentary material placed before the revenue authorities. The Ld. AR further submitted that the payments were made through banking channels and the business itself operated on a referral/multi-level commission model. Even the assessment order records that TDS had been deducted on commission payments aggregating to Rs.55,42,604/-. It was argued that once the Ld. AO had not identified any specific payment as bogus, excessive or unrelated to the assessee's business, an estimated disallowance of 30% merely on the basis of an assumed industry percentage was unsustainable.

Per contra, the Ld. DR relied upon the orders of the revenue authorities and strongly supported the impugned addition. The Ld. DR specifically drew our attention to page 17, paragraph 7.1 of the appellate order and submitted that the Ld. CIT(A) had recorded that the assessee failed to furnish complete and reliable evidence, including confirmations, proof of services rendered, referral linkage and justification of the commission vis-à-vis business generated.

The Ld. DR submitted that mere payment through banking channels or deduction of TDS would not, by itself, establish that the expenditure was incurred wholly and exclusively for the purpose of business. The Ld. CIT(A), in paragraph 7.1, also referred to the principle laid down by the Hon'ble Supreme Court in CIT v. Calcutta Agency Ltd. reported in [1951] 19 ITR 191 (SC) that the burden to establish the admissibility of expenditure is upon the assessee. Accordingly, the Ld. DR prayed that the order of the Ld. CIT(A) be sustained.

We have heard the rival submissions and perused the material available on record, including the paper book filed by the assessee. The limited issue before us is whether the 30% ad hoc disallowance out of the commission expenditure of Rs.68,83,823/- can be sustained on the facts of the present case. It is undisputed that commission expenditure is an integral component of the assessee's referral-based business model. The assessment order itself records that the assessee furnished a list of commission recipients and that TDS had been deducted in 80 cases involving aggregate commission of Rs.55,42,604/-. It also records the assessee's explanation that commission is paid to members on referrals and, as the membership chain increases, commission is payable at multiple levels.

Further, before us, the assessee has placed a paper book comprising pages 1 to 119. In particular, APB pages 07 to 21 contain the list/details of 4 commission payments in respect of which TDS was deducted, along with PAN particulars and Form No.26Q. Further, APB pages 76 to 90 contain the letter dated 23.07.2018 submitted before the Ld. AO along with details of the total commission payments. These documents assume significance because the principal objection of the revenue authorities is regarding the lack of particulars concerning the recipients and the commission payments.

We are conscious of the principle referred to by the Ld. CIT(A) that the initial burden to establish the allowability of expenditure claimed under section 37(1) rests upon the assessee. However, the material available on record has to be considered in its entirety. In the present case, the Ld. AO has not brought on record any material identifying any particular commission recipient as non- existent or any specified payment as bogus or not incurred for the purpose of business. Rather, after expressing doubts regarding the completeness of the evidence, the Ld. AO proceeded to estimate and disallow 30% of the entire commission expenditure.

Significantly, the basis adopted for such estimation was that commission in the multi-marketing sector would “normally” be between 20% and 25%, whereas the assessee had incurred commission at 35.42% of turnover. No comparable case, market data, industry material or other cogent basis for adopting the benchmark of 20% to 25% has been referred to in the assessment order. The assessment order merely treats 30% of the expenditure as unreasonable and thereby allows commission equivalent to approximately 25% of turnover.

We further notice that the assessee's commission-to-sales ratio was not wholly unprecedented in its own business. The assessment order records the ratio at 35.42% for A.Y. 2016-17, 29.93% for A.Y. 2015-16 and 37.41% for A.Y. 5 2014-15. Therefore, the percentage of commission in the year under consideration, by itself, cannot constitute a sufficient basis for an estimated disallowance without demonstrating defects in specific transactions or bringing relevant comparative material on record.

The reliance placed on Calcutta Agency Ltd. (supra) is distinguishable on facts. In that case, the Hon’ble Supreme Court found that the necessary facts supporting the claim of business expenditure had not been established by the assessee at any stage, and therefore held that the burden of proving the admissibility of the expenditure was not discharged. In the present case, however, the assessee has furnished substantive documentary evidence in support of the commission expenditure, including party-wise details, PAN particulars, TDS details/Form No.26Q and details of commission payments submitted before the Ld. AO. Even the assessment order records that TDS was deducted in 80 cases on commission aggregating to Rs.55,42,604/-. The Ld. AO has not identified any specific payment as bogus or non-business expenditure but has merely disallowed 30% of the total commission expenditure on an estimated basis. Therefore, while the principle that the initial burden of proving the expenditure lies upon the assessee is not disputed, the factual foundation on which Calcutta Agency Ltd.(supra) was decided is materially different from the facts of the present appeal. Accordingly, the said decision does not justify the impugned ad hoc disallowance.

In these circumstances, considering the documentary material furnished by the assessee, the details of recipients, PAN and TDS particulars, Form No.26Q, the details furnished before the Ld. AO through letter dated 23.07.2018, the nature of the assessee's referral-based business and, importantly, the absence of any specific finding that an identified commission payment was bogus or not incurred for business purposes, we find that the ad hoc disallowance of 30% amounting to Rs.20,65,147/- cannot be sustained merely on estimation. Accordingly, the addition of Rs.20,65,147/- is deleted and Ground No.1 raised by the assessee is allowed. Ground No.2 being general in nature requires no separate adjudication.

In the result, the appeal of the assessee bearing ITA No. 5270/Mum/2026 is allowed. Order pronounced in the open court on 08th day of September 2026. Sd/- Sd/- (RATNA DASGUPTA) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, िदनांक/Dated: 08/09/2026 Soumili, PS