SANJEEV KUMAR SHARMA,SAHARANPUR vs. JCIT, RANGE-3, SAHARANPUR

The facts in brief are that assessee is a trader in chemicals which are used in paper industries. During the relevant financial year, assessee has shown sales of Rs. 2,67,45,976/- and purchases of Rs. 1,73,06,954/-.The assessee has debited sum of Rs. 26,50,000/- under the head Commission account, which according to Ld. AO the rate of commission paid was more than 10%. In response to show cause notice, the assessee submitted that the commission was paid to various persons on purchases made on account of introduction of party to enter into contract of purchase. It was further explained that the nature of product is so sensitive and there is a huge risk of failure in trial of product, therefore commission agent has to ensure quality and is bound by terms and agreement to ensure the success of the product. In case the product is failed by the paper mill in trial, then the same are bound to be rejected and even the agent also loses his reputation. During the year assessee has paid following commission with the parties:- S.No. Name %age of Amount of Name of the Amount of commiss commission seller purchases ion made 1. Rajat Associates 15.36% 6,00,000/- S.R. Impex 39,05,783/- International, Star Chem Industries 2. Satish Kumar 15.09% 9,00,000/- Mahesh agro 59,64,832/- Sharma foods industries, Barmer praval creative starch 3. Perfect solution 14.43% 9,00,000/- Advance 62,36,611/- Inorganics Noida, DVS Chemicals Ludhiana, Raj Gelative Industries, Ludhiana 4. Anuj Kumar 13.63% 1,50,000/- Khurana 11,00,491/- Sharma Enterprises, Rajeev Chemicals, Reinol Obs 5. Vinayak Vinod 2.86% 1,00,000/- Against sales to 35,00,000/- Sharma Aryan paper mills

Ld. AO held that, such a payment of commission appears to be excessive and unreasonable because commission is paid on material which common and largely prevalent and the items purchased are non-monopolistic and its availability is not limited. The assessee has paid commission @ 2.86% on the sales, whereas on the purchase commission has been paid @ 13% to 15% which itself is illogical. He had summoned u/s 131(1) to three persons, out of which, one, Shri Anuj Sharma appeared and his statement on oath was recorded. In his statement, he gave the nature of services provided to the assessee and how he has introduced the purchasers for procuring good quality material to be used in the paper industry and the manner in which he has to coordinate between the two parties. However, the Ld. AO without finding any discrepancy in his statement observed that, his statement/submission cannot be relied upon. Accordingly, he held that commission payment of three persons of purchases is reasonable and balance he disallowed and thereby making a disallowance of Rs. 20,33,762/-.

Ld. CIT (A) too has confirmed the addition made by the AO on these two points holding that AO has made inquiries u/s 131 to find out the nature and genuineness of the services rendered by the four persons, out of which some of them did not comply and some of them 3 only filed copy of their account with their income tax return. He further observed that, from the statement of Shri Anuj Kumar Sharma nothing is borne out to substantiate the claim of the assessee that any kind of technical services have been rendered by them to substantiate such a heavy commission @ 13 to 15%. Further, there was no such written agreement as stated by Shri Anuj Sharma, hence agreements produced by the assessee in support of services for commission are not genuine. Accordingly, he confirmed the disallowance by the AO holding that 3% commission has been allowed by the AO is reasonable.

Regarding disallowance u/s 40(a)(ia) of Rs. 62,000/-, Ld. CIT (A) held that, since Shri Amit Kumar was not an employee, therefore, such incentive on sales is in the nature of commission for which TDS was required to be deducted.

Before us, Ld. Counsel for the assessee, Shri Sanjay Kumar, submitted that, first of all, these parties are not related to the assessee in any manner and do not fall in the category of ‘persons’ as specified in section 40A (2)(b). Secondly, similar payment of commission on purchases were made in the earlier years and in scrutiny proceedings passed us/143(3) such a quantum and rate of commission on purchases have been allowed. He also drew our attention to the related figures of turnover, purchases, gross profit, commission and net profit for year in appeal and immediately preceding year which is reproduced at page 3 of the appellate order as under :-

In so far as the disallowance of Rs. 62,000/- u/s 40(a)(ia), Sri Sanjay Kumar submitted that, Shri Amit Kumar was earlier employee of the assessee and this year, he has left the job and as and when his services were required for the purpose of promoting the sales, he was given the payment which in fact falls in the category of salary only and not in the nature of any commission. Since his salary payment was only Rs. 62,000/- and his income is below taxable limit, therefore, no TDS was required to be deducted.

On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A) and submitted that assessee could not substantiate such a high rate of commission paid to the agent especially when assessee was paying commission of less than 3% on sales. He also drew our attention to the relevant observation of the AO for rejecting the assessee’s claim. On the issue of disallowance of Rs. 62,000/- he submitted that, once the person was not an employee of the assessee and payment has been made as an incentive, then it falls in the nature of commission for which assessee was liable to deduct us/ 194H.

I have heard the rival submissions, perused the relevant finding given in the impugned order as well as material referred to at the time of hearing. It is an undisputed fact that assessee has made payment of commission to four parties, ranging between 13.63% to 15.33%. The case of the revenue is that, payment of commission is too high and excessive and, therefore, according to the AO and Ld. CIT(A) the reasonable payment of commission should be 3% . First of all, I am unable to appreciate such an approach and reasoning, because, once it is not in dispute that payment on commission is genuine transaction and it is a regular feature in the line of the assessee’s business, then how Revenue can decide or disallow on the ground that expenditure incurred is excessive. Here as pointed out by Ld. Counsel that similar rate of commission was paid in the earlier year also which has been accepted by the AO in the scrutiny proceedings for immediately preceding assessment year. It is not the case of the revenue that payment made to these commission agents falls in the category of ‘persons’ as defined in section 40A(2)(b), wherein expenditure has to be seen with regard to fair market value of services provided for which payment is made to such related persons. In terms of section 40A (2)(b), admittedly all these agents are unrelated persons and, therefore, without any evidence or material on record to show that these payments are excessive, the department cannot disallow the said payment by holding that the expenditure incurred is not reasonable. Once it is established that there was a nexus between the expenditure for the purpose of the business, then it is not open for the Revenue to hold that only certain amount of expenditure should have been incurred. It is trite proposition that while deciding the test of commercial expediency whether expenditure incurred was wholly and exclusively for the purpose of business, the revenue cannot decide the reasonableness of the expenditure and sit in the arm chair of the businessman. Here in this case, the assessee has explained the circumstances and the reason for which such a high rate of commission is paid for the purchase of chemicals as discussed in the earlier part of the order. No material has been brought on record by the AO by brining any comparable case that other suppliers of similar chemicals in the paper industry were not paying any commission or the payment of commission or very less. The yardstick of whether payment is excessive or reasonable can only be seen, where there is some kind of colourable transaction to suppress the profit by claiming inflated expenditure and if no such material is brought on record, then the quantum of expenditure spent cannot be questioned. Not only that, here in this case statement of one commission agent has been recorded who has categorically explained the entire nature and process of the chemicals procured; how he has introduced purchases for providing quality material used in the paper industry; what is the effect if material fails during the trial period; and how the responsibility for losses is to be owned. He has also explained that there is high risk of failure of the product on the basis of quality and why he has paid high commission for the assured quality so that the risk of failure is minimum. Without their being any discrepancy or any inconsistency in his statement, AO cannot discard the said statement and proceeded to make the disallowance of such a claim of payment of commission. Under the facts and circumstances the reasoning given by the authorities below cannot be upheld and accordingly, the disallowance of Rs. 22,33,762/- is deleted. In the result ground Nos. 1 and 2 are allowed.

Lastly, in so far as disallowance of Rs. 62,000/- on the ground that no TDS has been deducted before us, the Ld. Counsel has submitted that Shri Amit Kumar was an employee of the assessee till last year and in this year he was not employee for the whole time. Assessee has decided to pay him performance based salary instead of regular salary and the salary was paid in the form of incentive based on his support provided to the assessee by visiting the industries on behalf of the assessee during use of the products by the paper industry. The AO has held that such an incentive has to be treated as commission and therefore, assessee was liable to deduct TDS u/s 194H. How the said incentive has been treated to be as ‘commission’ is not clear, because once assessee has said that the incentive given to his ex employee was in the nature of salary, then simply rejecting the contention without any basis cannot be sustained. Even if any commission is paid in addition of any salary or wages that also falls in the category of ‘Salary’ in terms of clause (iv) of section 17. Since the assessee has only made payment of Rs. 62,000/- to Shri Amit Kumar and his income was below taxable limit, therefore, there was no requirement to deduct TDS. Accordingly, in these facts the disallowance u/s 40(a) (ia) cannot be made and thus, addition of Rs. 62,000/- is directed to be deleted.

In the result appeal of the assessee is allowed.