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Facts
The assessee company engaged in manufacturing industrial pumps paid sales commission, gratuity, and had director loans. The Assessing Officer (AO) disallowed a significant portion of the sales commission and gratuity and added notional interest on a director's loan. The Commissioner (Appeals) upheld most of these disallowances, leading to the present appeal.
Held
The Tribunal held that the sales commission paid to family members of directors was justified given their qualifications, experience, and services rendered to the company, and it was not necessary for commission to directly correlate with sales. The disallowance of gratuity was confirmed as it was a provision and not paid to a fund. The disallowance of notional interest on a director's loan was deleted as the company had sufficient interest-free funds.
Key Issues
Whether sales commission paid to relatives is allowable when services are rendered, whether gratuity provision is deductible, and whether notional interest on director's loan is disallowable if interest-free funds are available.
Sections Cited
143(3), 36(1)(v)
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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY
Per Prashant Maharishi, Vice President 1.
is filed by CPV Engineers Pvt. Ltd. (the assessee/appellant) for the assessment year 2014-15 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 14.6.2024 wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) of the Income- tax Act, 1961 [the Act] dated 22.12.2016 by the ITO, Ward 1[1], Hubballi was party allowed. Therefore assessee is in appeal before us raising the following grounds:-
“1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the disallowance of Rs.35,38,382/- being the Sales Commission paid under the facts and in the circumstances of the appellant's case. 2.1 The learned CIT[A] is not justified in holding that the appellant had not given the details of the specific work done by the 6 individuals to whom the commission was paid and further holding with regard to the commission payment made to three ladies that "it is not easy to conceive that these ladies could have been involved in the extracting process of making sales of industrial pumps to manufacturing units" and thereafter, holding that the onus was on the appellant to explain what specific work/ sale had been done by "these three especially", which findings ought to be vacated under the facts and in the circumstances of the appellant's case.
3. The learned CIT[A] is not justified in upholding the disallowance of Rs. 3,19,130/- being the amount of Gratuity paid towards settlement of dispute under the facts and in the circumstances of the appellant's case.
4. The learned CIT[A] is not justified in sustaining the addition of Rs. 1,80,000/- out of the original addition being the 12% computed as notional interest on loan taken by the Director under the facts and in the circumstances of the appellant's case.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
The main grievance of the assessee is the confirmation of disallowance of Rs.35,38,382 being the sales commission, disallowance of Rs.3,19,130 being gratuity paid and disallowance of Rs.1,80,000 out of interest expenditure.
The brief facts of the case show that assessee is a company engaged I the manufacture of industrial pumps spares and engineering components and sales of manufactured products, filed its return of income on 1.10.2014 at a returned income of Rs.11,44,380. Return was picked up for scrutiny. The assessment order was passed u/s. 143(3) of the Act on 22.12.2016. The total income was assessed at Rs.68,02,183. The assessee preferred appeal before the ld. CIT(A) which was partly allowed.
Ground No.1 of the appeal is general in nature and therefore same is dismissed.
Ground No.2 is with respect to confirmation of disallowance of sales commission of Rs.35,38,382. During the course of assessment proceedings, it was found that assessee has paid sales commission of Rs.69,30,890. The ld. AO asked the assessee to provide the details of services rendered by these commission agents. The assessee furnished the ledger copies of the commission paid and stated that the commission is inclusive of office rent, etc. and other miscellaneous expenses. On perusal of the details filed, it was found by the AO that a sum of Rs.35,38,382 has been paid to the family members of the assessee’s company directors. The AO observed that though there is a decrease in the turnover, the sales commission paid is found to be unreasonable as there is no corresponding increase in the turnover. Accordingly he held that commission is not justified. The AO further held that assessee did not furnish the details of orders by each of the commission agent with supporting documents, but assessee has merely mentioned that tax is deducted at source on such commission
Before the ld. CIT(A), assessee submitted the deduction details and details of the parties involved in the affairs of the company. Assessee also contended that tax has been deducted on payments and income is shown by these parties. The ld. CIT(A) noted that it is incumbent upon the assessee to give the details of specific work done by these individuals and to explain what sales has been made by these parties against which this commission was made. He also noted that out of 6 individuals, 3 are ladies including the wife and daughter-in-law of the director. He further noted that looking at the nature of the business of the assessee, it is not easy to conceive that these ladies could have been involved in the exacting process of making sales of industrial pumps. He noted that assessee has failed to give specific details of work done and accordingly he confirmed the disallowance.
The ld. AR before us submitted that in the subsequent year i.e., AY 2016-17 in the 143(3) assessment order, on identical issue, the ld. AO has disallowed only 10% of the commission income and in the present case he has disallowed the expenses completely. He further stated that during the course of assessment proceedings, assessee has submitted
the complete details of the persons who provided the services to the assessee and for which payment of commission has been made. He further referred to the fact that the son of the Director to whom the commission has been paid is a BE & MBA, was actively engaged in the conduct of business of the assessee. It is not necessary that sales commission paid to the various parties is required to be co-related with individual sales to the customers. He further stated that Shri J. Srinivas Singh, Smt. Surabhi Kasturi and Smt. Varsha C. Belamkar are qualified engineers, science graduate. The disallowance made by the ld. AO and confirmed by the ld. CIT(A) is not on the basis of the facts produced before them, but on guess-work. He further submitted that there is no hard and fast rule of the case that payment of commission must increase the turnover and in the decreasing turnover no sales commission can be paid.
The ld. DR vehemently supported the order of the ld. lower authorities and submitted that assessee has paid sales commission to the 6 family members which could not be justified because of decreasing turnover as well as the fact that out of 6 family members, 3 are ladies, therefore no fault can be found with the orders of the ld. lower authorities.
We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The assessee has paid the commission of Rs.35,38,382 to the 6 family members of the directors of the assessee. We find that Shri Amit R Belamkar to whom a commission is paid of Rs.4,02,630 is M.Tech post-graduate and is actively involved in the business of the company. Similarly Mr. Pawankumar A Belamkar is a BE and MBA. He is with this company since 2009. He has rendered services to the company and is paid Rs.5 lakhs as commission. Similarly Smt. Chandrakala R. Belamkar also is a BA graduate who qualified in the year 1995 and looking after the business of the company. Shri J Srinivas Singh is paid the commission of Rs.10,35,752. He is a BE and looking after the customers of the company. Smt. Surabhi Kasturi has been paid a commission of Rs.6 lakhs. She is a qualified engineer and is associated with the company since 2010. Shi Varsha C. Belamkar to whom commission of Rs. 2 lakhs is paid is MSc & MBA and looking after the technical and administrative work of the company.
Sales commission though is not related to the sales performed by the company, it is shown that these persons are associated with the company and are rendering services for the company. It is not that these persons do not have technical or administrative knowledge of the company. All these persons are though relatives of the directors of the company, but that does not mean that these persons have not rendered any services to the company. All these parties have disclosed this income in their return of income and tax deducted at source is also shown by the company. Though it is true that merely tax deduction at source on the payment as well as offering of the income in the hands of the recipient cannot be substantive evidence of performance of the services, however, in this case, looking at the experience and the educational qualification as well as the tenure with the company shows
that the expenses are not unreasonable but are wholly and exclusively incurred for the purposes of the business of the assessee company. It is not always necessary that sales commission can be paid only for the purposes of performance of the sales. It can also be paid on the sales of the company without identifying the individual sale bill. The payment may be for customer services, maintaining and development of customers, addressing the customer complaints, etc.. It is also a fact that in subsequent year out of the total sales commission paid to these people the ld AO has allowed the 90 % of such commission and disallowed merely 10 % of the commission. Thus, it is fact that in subsequent years also the ld AO , without any change in the facts and circumstances of the case has allowed the deduction of 90 % of such commissions. The learned CIT – A has also held that it is not easy for him to conceive that these ladies could have been involved in the exacting the process of making sales of industrial pumps to manufacturing units. This is merely an assumption. He has not looked into the credential of the educational qualification and association of these women with the company. He has also overlooked the No. of years these women has spent with the company which is explained by the assessee as indicated above. Accordingly, we do not find any reason to uphold the disallowance made by the learned assessing officer. Accordingly, we direct him to delete the disallowance of ₹ 3,538,382/– and allow ground No. 2 of the appeal.
Ground No. 3 of the appeal is with respect to the disallowance of the amount of gratuity paid towards settlement of dispute amounting to ₹
319,130. The brief facts of the case shows that the assessee has debited the above sum to the profit and loss account towards the gratuity. The learned assessing officer is of the view that the contribution towards an approved gratuity fund created by the assessee for the exclusive benefits of the employees is only deductible. Assessee submitted when questioned that assessee is a small scale industry, employees and the labour of the company are very less therefore it is not created a gratuity trust as per Gratuity Act. The assessee further submitted that as and when the company makes a considerable profit same is debited to the profit and loss account and created the same fund. The learned assessing officer disagreed with the submission of the assessee and stated that according to the provisions of section 36 (1) (v) of the Act the above sum is disallowable.
The assessee approached the learned CIT – A and submitted that the above sum does not represent the provision towards the gratuity, but it is the amount which is actually payable to the employees which is in dispute. It was submitted that out of the total sum due as on 31st of March 2014, a part of ₹ 131,460 has been paid to 3 employees in subsequent financial year after settlement of the dispute and therefore the balance amount of ₹ 319,130/– is outstanding amount payable to the employees as on that date. It was further stated that it is not a gratuity as stated in the financial statement. The learned CIT – A confirmed the disallowance holding that since the assessee has not complied with the provisions of the Income Tax Act under section 36 (1) (v) of the Act the addition was correctly made.
The learned authorised representative repeated the contentions raised before the learned lower authorities whereas the learned departmental representative supported the orders of the learned lower authorities.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that assessee has made a provision of the above sum of ₹ 319,130/– which is disclosed in schedule No. 26 of the annual accounts. The identical amount is also shown as increase in schedule 8 under the head short-term provision of provision for employees benefit gratuity fund. As at the beginning of the year it was outstanding of ₹ 1,485,963 and at the end of the year it was found to be ₹ 1,805,093. The exact increase is on account of the provision of ₹ 319,130. The assessee submits that it is not a gratuity but according to the annual accounts we find that it is a provision for payment of the gratuity which is not allowable unless it is paid in a gratuity fund. Accordingly we do not find any infirmity in the orders of the learned lower authorities. Ground No. 3 of the appeal is dismissed.
Ground No. 4 is with respect to the disallowance of ₹ 180,000/– which relates to the addition made by the learned assessing officer by applying the rate of 12% on loan taken by one of the directors for personal reasons. We find that that the learned assessing officer has applied the disallowance on the total sum of ₹ 27 Lacs and that too for a period of 33 months and the amount of loan pertaining for the assessment year 2014 – 15 is merely ₹ 15 lakhs. Therefore the learned
CIT – A restricted the same by applying 12% on ₹ 15 lakhs and thereby confirming the disallowance of ₹ 180,000 only.
The assessee is aggrieved with the above confirmation and is in appeal before us.
The learned authorised representative submitted that assessee has interest free funds available with the rate of approximately ₹ 57 lakhs and therefore it cannot be said that the amount of ₹ 15 lakhs granted to the directors of the company is not for the purpose of the business of the company and interest thereon can be disallowed.
The learned departmental representative relied upon the orders of the learned CIT appeal stating that substantial relief has been granted to the assessee.
We have carefully considered the rival contention and find that the assessee has interest free funds available more than the amount of rent interest free advances given to the director and therefore no disallowance of interest can be made. It is a settled position that if the assessee has more interest free funds available, then the amount of advance given interest free cannot be used to make a disallowance of interest payment made by the assessee. Accordingly we direct the learned assessing officer to delete the disallowance of ₹ 180,000/– out of the interest expenditure. Accordingly ground No. 4 of the appeal is allowed. for assessment year 2014 – 15 filed by the assessee is partly allowed.
The appeal for the assessment year 2015 – 16 in is filed by the assessee against the appellate order passed by the National faceless appeal Centre, Delhi on 14 June 2024 wherein the appeal filed by the assessee against the assessment order passed under section 143 (3) of the income tax act dated 7 November 2017 passed by the income tax officer Ward – 1[1], Hubli was dismissed.
We find that ground No. 2 is against the disallowance of commission expenditure of ₹ 3,006,757 which is identical to ground No. 2 of the appeal of the assessee for assessment year 2014 – 15, the identical disallowance has been deleted by us while deciding the appeal for that assessment year. Therefore, for the similar reasons we direct the learned assessing officer to delete the above disallowance and allow ground No. 2.
Ground No. 3 is with respect to the disallowance of ₹ 3,05,455/– being the amount of gratuity. The facts and circumstances of the case is identical to ground No. 3 of the appeal for the assessment year 2014 – 15 wherein we have confirmed the above disallowance. For the same reasons, we confirm the disallowance of ₹ 305,455 for this year and ground No. 3 of the appeal of the assessee is dismissed.
The ground No. 4 is with respect to the computation of notional disallowance of interest on loan taken by the director amounting to ₹ 324,000/– we find that the facts and circumstances of the case is identical to ground No. 4 of the appeal of the assessee for assessment year 2014 – 15 wherein we have deleted the above disallowance. For the similar reasons, we allow ground No. 4 of the appeal of the assessee for this assessment year and direct the learned assessing officer to delete the disallowance of ₹ 324,000/–. Accordingly the appeal of the assessee for assessment year 2015 – 16 is also partly allowed.
In the result, both the appeals filed by the assessee are partly allowed.
Pronounced in the open court on this 2nd day of December, 2025.