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Facts
The assessee company's return for AY 2007-08 was assessed by the AO, who disallowed Rs. 11,55,480 paid as commission to its Directors under Section 40A(2)(b) for lack of commercial expediency. This disallowance was upheld by the CIT(A), leading to the present appeal before the ITAT.
Held
The Tribunal observed that if the genuineness of expenditure is not in doubt and tax has been deducted at source, the AO cannot question the commercial expediency from a businessman's perspective. Consequently, it set aside the lower authorities' orders and directed the deletion of the commission disallowance.
Key Issues
Whether the AO and CIT(A) were justified in disallowing commission paid to Directors on the grounds of lack of commercial exigency and legitimate need, despite genuineness and TDS deduction.
Sections Cited
143(3), 40A(2)(b), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI PRAKASH CHAND YADAV, JM
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-2, Mumbai dated 17.10.2024 for Assessment Year (AY) 2007-08.
Brief facts of the case are that the appellant is a company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of producing toffees for M/s. Lotte India Corporation, Ltd. The return of income for AY 2007-08 was filed on 28.09.2008 disclosing total income of Rs. 1,28,72,698/-. Against the said return of income, the assessment was completed by the DCIT, JJ Confectionery Pvt. Ltd. Corporate Circle -1(1), Kochi (hereinafter called "the AO") vide order dated 07.12.2009 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) at total income of Rs. 1,41,06,470/-. While doing so, the AO made of Rs. 11,55,480/- being the amount of commission paid to the Directors by holding that the expenditure was not incurred on legitimate needs of the company and no necessity of incurring this expenditure and the expenditure is not reasonable and hit by section 40A(2)(b) of the Act.
Being aggrieved, an appeal was filed before the CIT(A), who vide the impugned order dismissed the ground relating to disallowance of commission paid to Directors.
Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
The learned counsel for the assessee submitted that the CIT(A) was not justified in confirming the addition of commission paid to the Directors on the ground that there is no necessity of paying commission to the Directors. It is further submitted that the CIT(A) ought not to have held that commission was not paid out of commercial exigency and, therefore, the expenditure cannot be allowed u/s. 37(1) of the Act. Payment of commission is not permitted under the provisions of section 198 of the Companies Act. Therefore, there was no justification.
On the other hand, the learned Sr. DR, supporting the orders of the lower authorities submits that no interference is called for.
We have heard the rival contentions and perused the material available on record. The issue that arises for our consideration is whether the AO is justified in making disallowance of commission paid to the Directors. On perusal of the assessment order, it will reveal that the AO had made disallowance of commission paid to Directors by necessity of expenditure and the benefits derived out of the expenditure. It is trite law that when genuineness of expenditure is not in doubt and the appellant company also deducted tax at source on such payments, AO cannot question the necessity of the expenditure. The question of commercial expediency of the expenditure should be examined from businessman’s point of view. The fact that no benefit was derived from the expenditure cannot be a reason for disallowance of commission expenditure. In the light of the above discussion, we set aside the orders of the lower authorities and direct the AO to delete the addition of commission payment s made to the Directors.
In the result, the appeal filed by the assessee stand allowed.
Order pronounced in the open court on 27th June, 2025.