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Facts
The assessee, a partnership firm, claimed commission expenses of Rs. 49,62,000/- for AY 2019-20 and 2020-21, which were disallowed by the AO as prior period expenses. The assessee contended that the liability crystallized in the current year and TDS was deducted. The CIT(A) upheld the AO's order.
Held
The Tribunal found that the assessee failed to provide evidence that services were actually rendered by the commission agents for the prior periods. Agreements were made in AY 2020-21, and updated returns were filed after the notice, raising doubts about the genuineness of the commission claim. The matter was remanded to the AO for fresh consideration.
Key Issues
Whether commission expenses pertaining to prior periods but paid and accounted for in the current year are allowable, and if the assessee has discharged the burden of proving services rendered.
Sections Cited
143(2), 142(1), 133(6), 139(8), 144B, 37BA, 10(2)(xv)
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Income Tax Appellate Tribunal, B BENCH, PUNE
Before: Dr. MANISH BORAD & SHRI VINAY BHAMORE
Assessee by : Shri Ramkrishna Lingsur Revenue by : Shri Ganesh B Budruk- Addl. CIT Date of hearing : 16.12.2025 Date of : 13.03.2026 pronouncement आदेश/ORDER PER SHRI VINAY BHAMORE, J.M. : This appeal filed by the assessee is directed against the order dated 07.10.2025 passed by Ld. [CIT(A)] NFAC, Delhi for the Assessment Year 2021-22. 2. Assessee has raised following grounds of appeal:-
1. The Ld. A.O has erred in disallowing commission of Rs. 49,62,000 on the ground that it pertained to prior period being F.Y 2018-19 and 2019-20 and without appreciating the fact that it has been expended wholly
and exclusively for the purposes of business.
2. The Ld. AO has erred in disallowing the commission without
appreciating the fact that the appellant being a firm, the tax rate is same le
30 percent in any of the years and claim of an expense in any year is tax neutral.
3. The Ld. A.O has erred in disallowing the commission on the ground that the appellant follows mercantile system of accounting and the commission pertained to earlier years where in fact the liability to pay
commission had not crystallized at all in the earlier years as the negotiations were in progress at that time.
The Ld. A.O has disregarded the fact that appellant firm has deducted the tax a source and has paid the same to the government in the year under consideration le A.Y 2021-22 and as per Rule 37BA, the income come
(correspondingly the expense) and TDS should be in the same year.
5. The Ld. A. O has erred in not appreciating the decision of Chandigarh ITAT
in the case of M/s Kamal Trading on the ground that facts of the case are different which i in fact not so as the facts are exactly identical.
The appellant craves leave to add, amend, alter or delete any of the grounds of appeal.
3. Facts of the case in brief are that the assessee is a partnership firm engaged in the business of manufacturing of pharmaceuticals intermediaries required for production of drugs and has furnished the return of income for the year under consideration on 6 January 2022 by declaring an income of ₹ 1,65,94,510. The case was selected for scrutiny under CASS. Statutory notices under section 143(2), 142(1) of the IT Act and show cause notice respectively were issued to the assessee. The assessing officer enquired about the commission expenses Rs 22,95,000/- paid to Manasi enterprises and RS 35,22,000/- paid to Mauli Corporation amounting in all to ₹ 58,17,000/-. After Considering the reply of the assessee the assessing officer allowed the commission payment of ₹ 8,55,000/- paid to Mansi enterprises, which according to him pertains to the year under consideration and disallowed the commission expenses of ₹ 49,62,000/- which according to him pertains to period prior to execution of the agreement that is Asstt Year 2019-20 and Asstt Year 2020-21 & for which he doubts that any such services were rendered by the recipient of commission, since no evidence of services rendered was produced . Accordingly vide order dated 22 December 2022 the assessing officer completed the assessment proceedings under section 143 (3) red with section 144B of the IT Act and determined total income at Rs 2,15,56,510/- as against the income of ₹ 1,65,94,510/- returned by the assessee. The above assessed income includes addition of ₹ 49,62,000/- on account of disallowance of commission expenses of ₹ 49,62,000/-.
4. Being aggrieved with the above assessment order the assessee preferred an appeal before the learned CIT appeal. After considering the reply and submissions of the assessee learned CIT appeal dismissed the appeal by observing as under
DECISION:
I have carefully considered the grounds of appeal raised by the assessee and written submission/documentary evidences made in support of its claim.
7.1. Ground Nos. 1,2,3,4 & 5 were raised against the action of AO in disallowing the commission of Rs.49,62,000/- as prior period expense.
After careful consideration of the facts and circumstances of the case prima facie it would appear that the issue involved is commission paid amounting to Rs.49,62,000/- pertaining to AYs 2019-20 & 2020-21 to the firms Manasi enterprises and Mouli corporation. The appellant claimed total commission expenses amounting to Rs.58,17,000/- during the AY 2021-22. The AO found that Rs.49,62,000/- was pertaining to the AYs 2019-20 & 2020-21. Further the AO called for the information u/s 133(6) of the Act from the recipients of the commission Le Mouli corporation and Manasi enterprises to verify the genuineness of the commission paid. It was revealed that both the firms had filed updated returns u/s 139(8) on 29.08.2022 Le after the Issue of notice u/s 142(1) dated 22.08.2022.
On the other hand, the appellant submitted that the terms of payment were not finalised and there was a difference of view between the appellant and agent. The appellant submitted the letters for fixing the rate of commission as evidence. The appellant further contended that disallowing otherwise allowable expenses treating as mere prior period expenses will only result in academic discussion with out any tangible result. The appellant submitted that TDS has been deducted on the commission paid during the AY
2021-22 and also submitted that as per rule 378A the income and TDS should be in the same year. The appellant relied on the decision of Hon'ble ITAT Chandigarh in the case of M/s Kamal trading.
In view of the facts and circumstance I am of the considered opinion the AO rightly disallowed commission amount paid pertaining to the AYs 2019-20 & 2020-21 amounting to Rs.49,62,000/- which cannot be allowed during the AY 2021-22. The grounds raised on this issue are dismissed.
8. In the result, the appeal filed by the assessee against u/s. 143(3) r.w.s. 1445 dated 22.12.2022 of the Act for AY 2021-22 is dismissed.
It is the above order against which the assessee is in appeal before this tribunal.
We have learned counsel from both the sides and perused the material available on record including the paper book furnished by the assessee. In this regard we find that during the year under consideration the assessee partnership firm has paid & debited commission expenses aggregating to ₹ 58,17,000/-. Admittedly commission expenses of ₹ 8,55,000/- only pertains to the year under consideration and commission expenses of ₹ 49,62,000/- pertains to prior period that is assessment year 2019-20 and 2020-21 which is prior to the date of execution of the agreement for which no evidences of services rendered were produced therefore the assessing officer disallowed commission expenses of ₹ 49,62,000/- being prior period expenses and learned CIT appeal also confirmed the action of the assessing officer. However it is the claim of the assessee that Mauli Corporation and Manasi enterprises procured sales for the assessee firm for assessment year 2019-20, 2020-21 and also for asstt Year 2021-22. For all these 3 Assessment years the commission bills were raised during the year under consideration by both the above service providers and the payment was also made during the year under consideration and TDS was also deducted by the assessee firm. It is the contention of the assessee that the rate of commission could not be determined during earlier two assessment years but was fixed during the year under consideration and therefore the liability was crystallised during the year under consideration and consequently the bills were raised by the service providers during the year under consideration and payment was also made and TDS was also deducted by the assessee partnership firm during the year under consideration which needs to be allowed in the light of following case laws –
Hon. Mumbai ITAT decision in Kellogg India (33 taxmann 397)
Hon. Mumbai ITAT decision in Tata Communication (32 taxmann 197)
Hon. Delhi High Court decision in Exxon Mobil (8 taxmann 249)
7. In this regard we find that the assessing officer noted that the agreement were made by the assessee firm with Mauli corporation & Mansi enterprises on 15-09-2020 & 01-02-2021 respectively, ie during Asstt Year 2021-22 only. It was also discovered during 133(6) proceedings by the AO that Mauli Corporation and Manasi enterprises has furnished updated returns under section 139(8) of the IT act only after issue of notice under section 142 (1) of the IT act. The assessing officer was of the view that since neither the agreement was entered during assessment year 2019-20 or 2020-21 nor any provision was made in earlier assessment years in accordance with mercantile accounting system which is being followed by the assesse and the commission was calculated for the period prior to execution of the agreement , it was inferred by the AO that the services in the earlier years were not provided, accordingly he disallowed the claim of prior period commission expenses . LD CIT (A) also approved the action of the assessing officer & dismissed the appeal filed by the assesse. We further find that even before us the counsel for the assessee could not produce any evidence with regard to the fact that Manasi enterprises and Mauli Corporation helped in any way in procuring the sales for the assessee firm instead only confirmation letter, invoices issued by the service providers and Ledger accounts in the books of the assessee were produced. During the course of argument when a specific question was asked by the bench, the counsel for the assessee could not answer anything regarding payment of GST on commission charges by Manasi enterprises and Mauli Corporation, since both the above service providers were having turnover more than the threshold limit ( Rs 20,00,000/- being service provider) as per the GST act & were liable to make payment of goods and service tax . Regarding the case laws relied on by the assesse we find that they are not applicable to the facts of instant case in hand since the question is not only with regard to allowability of prior period expenses but also of non availability of any evidence of services rendered by the above 2 commission agents . In this regard the observation of the Assessing officer on page 9 of the assessment order is relevant which is reproduced herewith:- Information was called for u/s 133(6) of the IT Act, 1961 from Manasi enterprises and Mauli Corporation in order to verify the genuineness of the commission amount of Rs. 22,95,000/- and Rs. 35,22,000/- respectively paid. On perusal of the reply received from Manasi enterprises and Mauli Corporation, it is gathered that updated returns were filed by them u/s 139(8) on 29.08.2022 i.e. after issue of notice u/s 142(1) dated 22/08/2022 which is after thought of the assessee firm.
The reply filed by the assessee is not acceptable in view of the facts mentioned above since the assesse has maintained its books of account on mercantile system and also the agreements were made by the assessee firm with Manasi Enterprises and Mauli Corporation on 01.02.2021 and 15.09.2020 respectively i.e. during F.Y. 2020-21. Therefore, it cannot be inferred whether Manasi Enterprises and Mauli Corporation have provided services in the previous years.
In view of the facts mentioned above, the expenses made by the assessee firm in respect of Commission pertaining to the prior period i.e. F.Y. 2018- 19 & 2019-20 amounting to Rs.49,62,000/- is hereby disallowed and added to the total income of the assessee.
Admittedly No evidence was furnished in support of services rendered by commission agent to assessee. Even before us the assessee could not lead any evidence on record in support of the services rendered by the commission agents. Thus the assessee has utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed by the recipient . In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. We also find support from Schneider Electric (India) Ltd. v. CIT [2008] 304 ITR 360/171 Taxman 177 (Delhi) wherein it was held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below:
"13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s. Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payments having been made by account-payee cheques cannot by itself show that M/s. Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal meetings etc. between the assessee and M/s. Ram Agencies to suggest that there was any relationship on the basis of which M/s. Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s. Ram Agencies. It seems a bit out of place that the parties entered into an oral business relationship involving such huge amounts of money over a period of time."
We further find support from Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of Income-tax [1967] 63 ITR 57 (SC)[20-09-1966] wherein it was observed as under:-
“It is an erroneous proposition to contend that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would still be open to the Income- tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xv). The question as to whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case”.
We further find support from coordinate bench decision passed in the case of ITO ward56(2) vs PKS Holdings order dated 01-06-2016 [2016] 71 taxmann.com 345 (Kolkata Trib) wherein it was observed in para 22 of the Order
We have heard the rival submissions. The learned DR reiterated stand of the AO as contained in the order of assessment. The learned AR relied on the order of the CIT(A). We have considered the rival submissions. The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, are all irrelevant considerations. In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The fact that the recipient of commission were wife of partners, the fact that the property that was purchased by the Assessee was in Mumbai are circumstances which go against the Assessee. As to how the property was identified by the recipient of commission, what is their expertise in the field of acting as intermediaries for purchase and sale of properties, whether the recipients have any past or future history of rendering similar services and earning income thereon are all relevant considerations, which ought to have been examined by the CIT(A) before allowing relief to the Assessee. In the given facts and circumstances of the case, we are of the view that it would be just and proper to set aside the order of CIT(A) on this issue and remand the issue to the AO for fresh consideration, with liberty to the Assessee to establish the ingredients necessary for claiming commission expense as allowable deduction. We make it clear that the burden to prove the ingredients necessary for claiming commission paid as allowable expense has to be established by the Assessee. The AO will afford opportunity of being heard to the Assessee before deciding the issue.
Respectively following the above Judgements/ Decisions and in view of our above discussion in foregoing paragraphs we are of the considered opinion that the assessee miserably failed to prove that the service providers namely Manasi enterprises and Mauli Corporation have actually provided any service to the assessee firm in procuring the sales for earlier two assessment years, since mere receipt or proof of payment or TDS does not prove that the services were actually rendered.
However Considering The totality of the facts of the case and in the light of Decision of ITO ward56(2) vs PKS Holdings order dated 01-06-2016 [2016] 71 taxmann.com 345 (Kolkata Trib) we deem it appropriate to set aside the order passed by learned CIT appeal and restore the matter back to the file of the assessing officer with a direction to decide the issue of allowability of commission expenses afresh after providing reasonable opportunity of hearing to the assessee. The assessing officer is directed to ask the assessee to produce 1 Evidence of Work ie Documentary evidence that the commission agent actually performed the services, such as emails, sales reports, or confirmation from customers, which support the contention of the assessee partnership firm that the above 2 parties have not merely received the payment in the name of commission but also actively participated in procuring the sales for the assessee partnership firm.
2 Information about the above 2 parties that they have provided any such services to any of the other party in the past or for the subsequent period.
3 The assessing officer is also directed to conduct independent enquiry from GST Department that whether the above 2 parties were liable to make payment of any Goods & service Tax on receipt of impugned commission income and whether they disclosed the above transaction before the GST department & paid GST on the commission charges received from the assessee partnership firm or not.
Accordingly the assessing officer is directed to decide the issue afresh and as par fact & law after providing reasonable opportunity of hearing to the assesse. The assessee is also hereby directed to respond to the notices issued by the assessing officer in this regard and also directed to produce evidences documents in support of its contentions that Manasi enterprises and Mauli Corporation have in fact provided services to the assessee . The ground of appeal raised by the assesse are allowed for statistical purposes.
In the result Appeal of the assessee is allowed for statistical purposes.