MAHALINGA TEXTILES,THENI vs. ITO,WARD-1, THENI

The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO upholding the disallowance of commission expenses of Rs.12,13,960/-, as the expenses are not supported by bills and vouchers and moreover, the expenditure incurred is not exclusively for the purpose of business.

Brief facts are that the assessee is a commission agent for textile mills and declared commission income in its return of income for the assessment year 2015-16 at Rs.86,500/- filed on 01.12.2015. The return of income for assessment year 2015-16 was selected for scrutiny assessment under CASS and notices u/s.143(2) & 142(1) of the Act were issued. In response to above notices, assessee produced books of accounts, bank account statement, vouchers for expenses incurred before the AO and return of income was accepted. Subsequently, a show cause notice was issued u/s.263 of the Act for revising the assessment for the reason that the assessment framed is erroneous insofar as prejudicial to the interest of the Revenue for the reason that the vouchers for commission expenses to the tune of Rs.24,44,407/- has not been verified by the AO and also unsecured loans taken by the assessee and cash introduced by the partners have not been - 3 - verified. Consequent to the revision order passed by the PCIT u/s.263 of the Act, the AO framed the assessment afresh calling for and examining the records and evidences, the AO required the following documents:- 1. Detailed note on nature of business activities 2. Copies of ledger accounts for the following expenses 3. i)Bank Charges i) Bank Interest ii) Commission received iv) Balance Sheet with annexure (v) Profit & Loss Account 4. Commission Expenses details 5. Details for Unsecured Loans and its Confirmations and 6. Details for Cash introduced by the partners In view of the above queries, the assessee submitted copies of vouchers for commission expenses incurred, loan confirmation, letter confirming borrowings, ledger account copies, detailed note of business activities etc. The assessee explained before the AO that out of total commission expense of Rs.27,44,407/-, a sum of Rs.12,30,447/- was paid on various dates by cash and balance amount of commission expenses of Rs.12,13,960/- was paid through bank accounts. The assessee uploaded the copies of cash vouchers to the tune of Rs.12,30,447/- through online. Since the balance commission amount of Rs.12,13,960/- has been paid through bank account on various dates, the assessee has not uploaded the vouchers but submitted its bank statement for said period evidencing the fact that the payment for commission - 4 - PAN number. But the AO disallowed the expenses claimed on account of payment of commission u/s.37 of the Act by observing in para 10 & 11 of the assessment order as under:- “10. In this connection, it is also submitted that these deductions u/s 37 cannot be said to have been laid out or expended wholly and exclusively for the purposes of business. The expenses remain under the purview of non- verifiability and hence, can be said to be of personal nature. In this regard, provisions of section 37 is reproduced as:

(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

The Draft Assessment Order along with computation of total income was sent to the assessee through SCN Module on 29.03.2022. In response to the same, the assessee has submitted his reply on 31.03.2022 that commission expenses of Rs.12,13,960/- were made through bank current account. The reply is duly considered but not acceptable as in assessee's reply dated 2.12.2021, it has itself accepted to have failed to deduct TDS on the commission expense of Rs. 12,13,960/-. Therefore, Rs. 12,13,960/- is being hereby disallowed u/s 37(1) of the Act.

Due to non-verifiability of these claims, in absence of submissions by the assessee, in spite of adequate opportunities of being heard given to him, Rs. 12,13,960/- is being hereby disallowed u/s 37(1) of the Act as the assessee has failed to submit any documentary evidence against the said claim. Penalty proceedings u/s 271(1) (c) is hereby initiated for furnishing inaccurate particulars of income.” Aggrieved, assessee preferred appeal before CIT(A).

The CIT(A) noted that the assessee is unable to submit proof of expenses as AO has to strictly examine the issue in all aspects and burden lies on the assessee to prove the same. He noted that the assessee had able to submit only a statement of commission payable as on 31.03.2015 and the relevant bank statement. But according to him, this is not sufficient compliance. Further, he noted that it is found from the statement submitted in respect of commission paid, the date of entry in books is shown as made on 31.03.2015 and the entire impugned amount is shown as outstanding as on 31.03.2015. Majority of the payments shown as paid in the subsequent financial year i.e., 2015-16 mainly from the middle of the year to the end of the FY 2015-16. Also, majority of the commission agents demand the commission payment on or before the business transaction takes place (or) immediately concluding the business transaction. This entry is clearly indicating the pattern of payment which is against the trade practice in the commission business. Further, no proof is submitted before the AO that the impugned amount is paid only for the purposes of business and the amount is in the nature commission paid. All the amounts of commission in each case claimed is also exceeding the threshold limit to deduct tax u/s 194H of the Act. The reason for failure of deduction of TDS is not provided by the assessee. Though non- - 6 - deduction of tax is one of the reasons for suspect the genuineness of expenditure, various other ways to prove the expenditure claimed as genuine and incurred for the business purpose in the form of commission paid/payable is not substantiated by the assessee. Therefore, the ground of appeal raised to allow the expenditure does not merit consideration and, hence, dismissed. In view of the above, he dismissed this issue of assessee’s appeal. Aggrieved, now assessee is in appeal before the Tribunal.

In the result, the appeal filed by the assessee is partly- allowed.