SAHA TRACTORS,UTTAR DINAJPUR vs. ITO, WD-2(4), RAIGANJ, UTTAR DINAJPUR

The Assessee is a partnership firm and it carries on the business of sale of tractors and its parts under the name and style of M/s. Saha Tractors. In the course of assessment proceedings for A.Y.2014-15 the AO noticed that the assessee had made cash payments towards sales promotion expenses to 5 of its employees. The details of which were as follows :-

According to the provisions of section 40A(3) of the Income Tax Act, 1961 (Act) where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank exceeds rupees twenty thousand, no deduction shall be allowed in respect of such expenditure. The AO making a reference to the aforesaid payments came to the conclusion that a sum of Rs.17,06,000/- cannot be allowed as a deduction for violation of section 40A(3) of the Act.

The AO also noticed that the assessee had paid the following sums by cash as sales commission to the aforesaid 5 persons who were its own employees as follows: (These payments did not violate Sec.40A(3) of the Act )

He was of the view that since the aforesaid persons were salaried employees of the assessee there is no need to have paid sales commission separately. The AO was of the view that the sum in question was in the nature of commission and therefore the assessee ought to have deducted tax at source at the time of making the payment. Since the assessee failed to do so the AO was of the view that the aforesaid amount should be disallowed u/s 40(a)(ia) of the Act.

The assessee had claimed before the AO that there is no prohibition for making payment to salaried employees of sales commission. The assessee reiterated that there is no violation of section 40A(3) of the Act because individual payments under a single voucher was Rs.20,000/- or less and therefore there is no violation of the provision of section 40A(3) of the Act. With regard to violation of section 40(a)(ia) of the Act the assessee produced the employees before the AO and all the employees accepted that they have received the commission and have also offered to tax the commission received from the assesee in their return of income. The assessee therefore claimed that no disallowance u/s 40(a)(ia) of the Act can be made.

The AO however did not accept the claim of the assessee and he added a sum of Rs.17,06,000/- to the total income of the assessee as disallowance u/s 40A(3) of the Act and further disallowed a sum of Rs.14,40,430/- u/s 40(a)(ia) of the Act and in all a sum of Rs.31,46,430/- which was commission paid to the aforesaid five employees of the assessee was added to the total income of the assessee.

Aggrieved by the order of AO the assessee preferred appeal before CIT(A). The CIT(A) agreed with the submissions of the assessee that the provision of section 40A(3) of the Act was not applicable in the case of the assessee because payments in a day in respect of each one of the Bill/voucher did not exceed Rs.20,000/- and therefore there was no violation of the provision of section 40A(3) of the Act. The CIT(A) held that section 40A(3) of the Act would not be applicable even if payment to a person is more than Rs.20,000/- in a day if as per the invoice for individual transaction the payment is Rs.20,000/- or less. With regard to the disallowance u/s 40(a)(ia) of the Act the CIT(A) held that since the payee had declared the sum received in their return of income there is no loss to the revenue and therefore no disallowance can be made u/s 40(a)(ia) of the Act.

The CIT(A) however sustained the addition of disallowance of 25% of the sales promotion expenses on the ground that it was not supported by proper vouchers and payments were made in cash. The following were the observations of CIT(A) in this regard :- “During the course of hearing the A/R was asked to show the bills and vouchers in support of payment made by these five persons. However, the A/R stated that only self-made vouchers are there. In the absence of proper vouchers it was proposed to disallow 25% of the sales promotion expenses. The A/R did not object to this proposal. Relevant order sheet noting is reproduced below :

Aggrieved by the aforesaid action of CIT(A) in sustaining addition of 25% of the sales promotion expenses, the assessee has preferred the present appeal before the Tribunal.

The ld. Counsel for the assessee submitted that there was no such acceptance to the addition made by CIT(A)as stated in the impugned order and therefore the assessee is entitled to challenge the addition sustained by the CIT(A) before the Tribunal. He submitted that the genuineness of expenses were never doubted by the AO and all the five persons appearing before the AO had accepted that they had rendered services to the assessee for which sales commission was paid. In these circumstances it was submitted that the disallowance made by CIT(A) on the ground that the payments of sales promotion expenses were supported by self made vouchers cannot be sustained. The ld. DR relied on the order of CIT(A).

I have considered the rival submissions. The findings of the CIT(A) regarding applicability of Sec.40A(3) of the Act and sec. 40(a)(ia) of the Act have not been challenged by the Revenue. Therefore the only issue to be decided is as to whether the CIT(A) was justified in sustaining addition of 25% of sales promotion expenses on the ground that the expenses were supported only by self made vouchers and payments were made in cash. It is clear from the order of AO that all the five persons to whom the sales commission in question was paid had appeared before the AO and confirmed that they have received sales commission from the assessee. In these circumstances the genuineness of the payment of commission cannot be doubted. The fact that the expenses were paid in cash cannot also be the basis to sustain disallowance made by the AO so long as there is no violation of the provision of section 40A(3) of the Act. In this regard we find that the ITAT Kolkata ‘A “Bench in the case of M/s Excel Engineers vs JCIT vide order dated 25.11.2016 considered the provision of applicability of section 40A(3) of the Act and came to the conclusion that if the value of each bill/invoice was Rs.20,000/- or less and if payments made to a single person toward several bills or invoices where the value of each such bills and invoices was Rs.20,000/- or less then the payment made to settle each bill/invoice cannot be hit by the provision of section 40A(3) of the Act as each bill/invoice has to be considered as a separate contract. In these circumstances I am of the view that the addition sustained by CIT(A) is without any basis and the same is directed to be deleted.

In the result the appeal by the assessee is allowed.