Disallowance u/s 40A(2) of Commission paid to relatives cannot be made without proper enquiry

Citation: ACIT Vs. Sh. Saurabh Batra (ITAT Delhi), I.T.A No. 420/Del/2013 [Assessment Year : 2008-2009], Date of pronouncement: 02.07.2015

Brief Facts:

The assessee is an individual, who filed his return of income for the Assessment Year 2008-09, declaring an income of Rs. 8,60,482/-. The same was revised twice by the assessee – first, due to increasing deductions claimed, by Rs. 10,500/- and after that, declaring an income under the head ‘Capital Gains’, that gave rise to a consequent increase in total income by Rs. 8,49,886/-.
The said return was processed u/s 143(1)(a) of the Income Tax Act, 1961. Subsequently, the case was selected for scrutiny.
The AO notice in the course of proceedings that the assessee had claimed commission expenses, totaling Rs. 1,49,82,287/-, as a result of which, the assessee was asked to furnish the details of the aforementioned commission expenses. The details furnished by the assessee revealed that assessee had paid commission to three family members, totalling a sum of Rs. 89,43,123/-.
The AO asked the assessee to furnish justification of commission paid to family members u/s 40A(2) of the Act. The assessee, in reply thereto, furnished a detail of commission payment showing the percentage being paid to outsiders and family members. It was observed that family members were paid 5% to 5.19% as compared to outsiders, who were being paid @ 3.87% to 5%.
Accordingly, A.O. disallowed 20% of commission i.e. Rs. 17,88,629/-, by invoking the provisions of Section 40A(2) of the Act.
CIT(A) observed that A.O. had arrived at conclusion for the whole year on the basis of a sample transaction. A.O. had ignored the fact that the assessee had paid higher commission to some unrelated parties as well. Thus, the disallowance is without any basis for quantification and hence, the same was deleted by A.O.
Revenue Contention

The ld. DR strongly supported the order of the AO and reiterated the observation made in by the Assessing Officer. As stated earlier, the AO observed that the assessee was paying commission @ 3.87% to 5% to other parties whereas in the case of family members the commission was being paid from 5% to 5.19%. On the basis of the fact, the disallowance of 20% of the commission expense is justifiable.

Assessee Contention

On the issue raised by A.O. with regard to comparability of percentage being paid to family members and outsiders, the assessee contended before the A.O. that the relatives had done business of financing of motor cars independently through various car dealers in the market and the business of those relatives have got the bulk business and volumenise much above the direct parties.
The contention of the assessee before the ld. CIT(A) was that the observation of the AO that the commission was paid to the relatives parties @ 5% to 5.19% and to other parties @ 3.87% to 5% was not correct and not based on facts. It was pointed out that the commission paid to other parties was 2.63% to 5.30% and to the relatives was 4.78% to 5.18%.
Before Hon’ble ITAT, the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). It was further submitted that assessments for A.Y. 2007-08 and 2009-10 were also completed but no such disallowance was made therein.
Court Order

In the present case, it appears that the AO on the basis of wrong selection of sample, came to the conclusion that the assessee was paying commission at the higher rate to the related parties in comparison to the unrelated parties.
The AO had choosen three parties out of the 62 unrelated parties and came to the conclusion that the rate of commission was ranging from 3.87% to 5% while the commission paid to the related parties was ranging 5% to 5.19%.
The AO was not justified in presuming that the commission paid to the related parties was at higher rate. It was also noticed that assessments for A.Y. 2007-08 and 2009-10 were also completed but no such disallowance was made therein.
Furthermore, the AO made the disallowance by invoking the provisions of section 40A(2) of the Act, however nothing was brought on record on the basis of the comparative analysis to substantiate that the commission paid to the related parties was higher than the commission paid to unrelated parties.
It is also not the case of the AO that the payment was made at a higher rate than the market rate, he had also not given any basis for making the adhoc disallowance @ 20% of the commission payments to the related parties.
Thus, the appeal of Department is dismissed.