Bombay HC: Commission payments are allowable as business expenditures
Title: The Indian Hume Pipe Co. Ltd. v. Commissioner of Income Tax
Decided on: 31st AUGUST, 2023.
+ INCOME TAX APPEAL NO.744 OF 2002
CORAM: G.S. KULKARNI & JITENDRA JAIN, JJ.
Facts of the Case:
This appeal consolidates disputes arising from assessment years 1986-87, 1987-88, and 1988-89, centered around a common order by the Income Tax Appellate Tribunal on January 18, 2002. The appellant, a listed limited company, specializes in manufacturing and selling R.C.C. Pipes and Steel Pipes used for water supply and drainage systems. The appellant’s return of income for the assessment year 1986-87 was selected for scrutiny assessment. The main issue revolves around the disallowance of commission payments made to various parties, amounting to Rs. 26,90,104.
Issues:
- Whether the commission payments made by the appellant to various parties should be treated as allowable business expenditures?
- Whether the Tribunal’s conclusion that the commission agents did not provide services justifying the payment of commission is based on valid and relevant material and is legally sustainable?
Contentions:
The appellant contends that the commission payments should be allowed as business expenditures, as they were made based on legally binding agreements with commission agents who rendered services to assist the appellant in securing contracts and recovering payments. The appellant points out that these commission agents were unrelated to the company and confirmed the receipt of the commissions. They argue that their case is consistent with prior assessment years and cite relevant case laws to support their contention.
On the other hand, the respondent revenue argues that the appellant failed to provide concrete evidence demonstrating the services provided by the commission agents. They assert that the Assessing Officer’s and Tribunal’s findings are based on factual analysis and should not be questioned under Section 260A of the Income Tax Act. The respondent revenue also raises the issue of the reasonableness of the expenditure, highlighting the Revenue’s role in assessing whether the commission payments were genuinely made for business purposes.
Decision:
After a comprehensive analysis, the Court finds that both the Assessing Officer and the Tribunal were unjustified in partially disallowing the commission payments. They noted that by allowing partial payments, both authorities had implicitly acknowledged the commission agents’ services. The Court further emphasized that the Revenue’s inconsistent stance and its involvement in determining the quantum of expenditure were not permissible under the Income Tax Act.
The Court ruled in favor of the appellant, emphasizing that the choice to engage commission agents for tendering and payment follow-ups is a business prerogative. They reiterate that commercial expediency should be viewed from the business’s standpoint and not from the Revenue’s perspective. Consequently, the Court allows the appellant’s appeal, emphasizing that the Revenue should maintain consistency in its approach. The decision serves as a precedent for the validity of commission payments made in commercial transactions, upholding the principles of business expediency and consistency.
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Written by- Aparna Gupta, University Law College & Dept. of Studies in Law