PRIME DISTRIBUTORS,MUMBAI vs. INCOME TAX OFFICER, MUMBAI

Briefly stated, the facts of the case are that, the dispute pertains to the disallowance of commission expenditure amounting to Rs.37,68,000/-. During the assessment proceedings, the Assessing Officer ("AO") observed that the assessee had claimed commission expenditure of Rs.37,68,000/- while declaring sales of Rs.1,41,17,484/-. The assessee is engaged in the business of trading/reselling pharmaceutical and cosmetic products. The AO noted that the sales were effected primarily to various Government hospitals situated in Mumbai and other parts of the State of Maharashtra. According to the AO, the assessee failed to furnish documentary evidence such as agreements, contracts, correspondence, or any other material demonstrating the nature of services rendered by the commission agents. The AO further observed that procurement by Government hospitals is ordinarily carried out through a tendering process, wherein the involvement of intermediaries or commission agents is generally not envisaged. Proceeding on this premise, the AO concluded that the commission expenditure had not been substantiated and accordingly disallowed the entire amount of Rs.37,68,000/-.

Aggrieved by the assessment order, the assessee carried the matter in appeal before the Learned CIT(A). It was contended that the impugned commission expenditure was not incurred in relation to the sales effected by the assessee to Government hospitals, but represented commission paid to various persons for facilitating commission-based business procured by the assessee from different pharmaceutical companies. The Learned CIT(A), however, was not convinced with the explanation furnished. According to the Learned CIT(A), the explanation did not accord with the business pattern reflected in the financial statements and the assessee had failed to establish a direct nexus between the commission payments and the corresponding commission income earned. The Learned CIT(A) further held that deduction of tax at source and payment through banking channels, by themselves, do not conclusively establish the genuineness or business expediency of the expenditure. The Learned CIT(A) also observed that the expenditure of Rs.37,68,000/- appeared disproportionately high having regard to the scale of operations and the commission income disclosed. Accordingly, the disallowance made by the AO was confirmed.

During the course of hearing before us, the Learned Authorised Representative ("Ld. AR") invited our attention to the Profit and Loss Account placed in the paper book. It was submitted that the assessee had disclosed commission income of Rs.61,55,857/- and commission expenditure of Rs.37,68,000/-, both of which formed part of the regular books of account.

The Ld. AR submitted that the commission income was earned by the assessee from the aforesaid pharmaceutical companies for facilitating sales of their products. In order to obtain such business and facilitate the execution of these transactions, the assessee had engaged various agents and paid commission to them. Thus, the commission expenditure was incurred wholly and exclusively for earning the commission income received from the above mentioned companies. It was emphatically contended that the commission expenditure had no nexus whatsoever with the direct sales of Rs.1,41,17,484/- effected by the assessee to Government hospitals. The entire premise adopted by the AO proceeded on an erroneous assumption that the commission was paid in relation to Government procurement contracts. In reality, the commission payments were made to agents who procured business from the pharmaceutical companies, enabling the assessee to earn commission income.

The Ld. AR further drew our attention to the documentary evidence placed on record, including the details of the income-tax returns filed by the respective commission recipients, wherein the commission received from the assessee had been duly disclosed as taxable income. It was also pointed out that tax had been deducted at source on the impugned payments and the payments had been made through normal banking channels. It was submitted that all these evidences had already been furnished before the lower authorities and no fresh evidence was being relied upon before the Tribunal.

We have carefully considered the rival submissions and perused the material available on record. From the financial statements and documentary evidence placed before us, it is evident that the assessee has disclosed commission income of Rs.61,55,857/- received from various pharmaceutical companies. The explanation consistently advanced by the assessee is that these companies had engaged the assessee to facilitate the marketing and sale of their products and, in turn, the assessee engaged different agents for procuring such business. Consequently, a part of the commission income earned by the assessee was passed on to such agents in the form of commission expenditure.

In our considered opinion, the AO proceeded on an incorrect factual premise by assuming that the commission expenditure was incurred in connection with the assessee's direct sales to Government hospitals. Once it is demonstrated from the books of account that the commission expenditure is intrinsically linked with the commission income earned from third party pharmaceutical companies and not with the direct sales reflected in the trading account, the very foundation of the disallowance ceases to survive.

We further note that the assessee has furnished the names of the commission recipients, details of tax deducted at source, proof of payment through banking channels, and copies of the income-tax returns of the recipients showing disclosure of the commission income. These evidences lend substantial corroboration to the genuineness of the transactions. Although deduction of tax at source or payment through banking channels may not, by themselves, conclusively establish the allowability of an expenditure, they nevertheless constitute relevant corroborative evidence when considered in conjunction with the surrounding facts and the overall business arrangement.

The Revenue has not brought on record any material to demonstrate that the commission payments were fictitious, that the recipients were non-existent, or that the payments had reverted to the assessee in any manner. Nor has any enquiry been conducted to controvert the evidence produced by the assessee. The disallowance rests solely on an erroneous understanding of the nature of the transactions.

Having regard to the totality of the facts and circumstances of the case, we are satisfied that the commission expenditure of Rs.37,68,000/- was incurred wholly and exclusively for the purposes of the assessee's business and bears a direct nexus with the commission income earned by the assessee. The assessee has discharged the burden cast upon it under section 37(1) of the Act by establishing the identity of the recipients, the genuineness of the payments, and the business purpose for which the expenditure was incurred.

Accordingly, we set aside the order of the Learned CIT(A) and direct the AO to delete the disallowance of Rs.37,68,000/-.

In the result, the appeal filed by the assessee is allowed.