Case Law Details
Kishore Kumar Moolchand Jain Vs DCIT (ITAT Bangalore)
Bengaluru ITAT: Ad Hoc Restriction of Commission to 2% Without Comparable Evidence Unsustainable; Section 40A(2)(b) Inapplicable to Interest Paid to Non-Related Party
The Bengaluru Bench of the ITAT held that commission expenditure cannot be disallowed on an ad hoc basis merely because the Assessing Officer considers a lower rate to be reasonable, without any comparable cases, market data, or supporting evidence. The Tribunal observed that since the Revenue did not dispute the genuineness of the commission payments or the services rendered, the arbitrary restriction of commission from 4% to 2% was unsustainable. Accordingly, the disallowance of ₹26.23 lakh was directed to be deleted.
The Tribunal further held that section 40A(2)(b) could not be invoked to disallow interest paid to a person who was not a specified related party. It noted that the impugned loan was unsecured, the recipient was not covered by section 40A(2)(b), and the assessee had demonstrated that State Bank of India charged 17.10% even on secured loans. Therefore, payment of 18% interest on an unsecured loan could not be regarded as excessive or unreasonable. Consequently, the disallowance of ₹95,928 was also directed to be deleted.
Accordingly, the Tribunal deleted both the disallowances made by the Assessing Officer and sustained by the CIT(A), holding that they lacked legal and factual foundation. The appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. Shri Kishore Kumar Moolchand Jain [the appellant] has filed this appeal for AY 2022-23 against the appellate order dated 21 January 2026 passed by the national faceless appeal centre [ thee Ld. CIT (A) ] , whereby the appeal against the assessment order passed under section 143(3) of the Income Tax Act, 1961 [the Act] by the national faceless Assessment centre [the ld. AO] the Deputy Commissioner of Income Tax, Circle 7(1)(1), Bengaluru [the learned Assessing Officer], was dismissed.
2. The assessee is aggrieved by the disallowance of commission expenditure of ₹26,23,350 and the disallowance of ₹95,928 under section 40A(2)(b) of the Act, both confirmed by the learned CIT(A).
3. Briefly stated, the assessee is an individual carrying on business through his proprietary concern, Manavat Pharma, as a wholesale pharmaceutical distributor dealing in medicines, medical equipment, disposable syringes, and allied trading activities.
4. For the relevant assessment year, he filed his return of income on 25 September 2022 declaring total income of ₹18,41,058, which was selected for scrutiny. During assessment proceedings, the learned Assessing Officer noted payments to relatives attracting section 40A(2)(b) of the Act and issued a show-cause notice regarding interest of ₹94,70,375 paid to several relatives. The learned Assessing Officer also found that the assessee had claimed commission expenditure at 4%, largely paid to family members. Holding that, as per market trend, 2% commission was sufficient for the business, he allowed commission to that extent and disallowed ₹26,23,350 out of total commission of ₹52,46,700.He further observed that interest of ₹2,87,783 had been paid at 18% to one relative, whereas interest paid to others ranged from 6% to 12%. In the absence of proper justification, he allowed interest at 12%, amounting to ₹1,91,855, and disallowed the balance ₹95,928 by invoking section 40A(2)(b).
5. Accordingly, the total income was assessed at ₹45,60,336 as against the returned income of ₹18,41,058, resulting in two disallowances: commission expenditure of ₹26,23,350 and interest expenditure of ₹95,928 under section 40A(2)(b).
6. Aggrieved, the assessee preferred an appeal before the learned CIT(A). Though four opportunities of hearing were granted, the assessee did not avail them, as recorded in paragraph 5 of the learned CIT(A)’s order. The learned CIT(A) therefore dismissed the appeal and confirmed the action of the learned Assessing Officer.
7. Aggrieved by the assessment order and the appellate order, the assessee has preferred this appeal before us. The learned authorised representative, Smt. Suman Lunkar, filed a detailed paper book of 78 pages, including copies of replies filed before the learned Assessing Officer. She submitted that the learned CIT(A) failed to decide the issues on merits despite having all relevant facts before him. Referring to the statement of facts filed before the learned CIT(A), she contended that the commission expenditure was disallowed merely on the ground that 2% commission was sufficient for the business, without any comparable case, market data, or other material to support that conclusion. According to her, the disallowance was purely ad hoc, as 50% of the expenditure was allowed and 50% disallowed without reason. She further submitted that neither the learned CIT(A) nor the learned Assessing Officer held that the expenditure was non-genuine; had that been the case, the entire expenditure would have been disallowed.
8. Regarding interest expenditure, the learned authorised representative submitted that interest was paid at 18% per annum to Shri Deepak Jain and that the learned Assessing Officer invoked section 40A(2)(b) of the Act. She submitted that the loan from Shri Deepak Jain was unsecured, had no specific repayment agreement, and was not from a related party; therefore, section 40A(2)(b) could not apply. She also referred to the statement of facts before the learned CIT(A) to show that the State Bank of India charged 17.10% on unsecured personal loans. Hence, interest paid at 18% to a private party without security could not be treated as excessive or unreasonable. She therefore argued that both disallowances ought to have been deleted by the learned CIT(A)on the basis of the assessment record and the statement of facts before him.
9. The learned departmental representative, Sri Ganesh R. Ghale, Standing Counsel for the Revenue, strongly supported the orders of the lower authorities. He submitted that the learned CIT(A) granted five opportunities to the assessee, which were not availed for reasons best known to the assessee. He further submitted that the learned CIT(A) had no occasion to consider the facts stated in the statement of facts and therefore confirmed the action of the learned Assessing Officer. According to him, the learned Assessing Officer gave detailed reasons for disallowing the interest and commission expenditure, and no infirmity could be found in the orders of the lower authorities.
10. We have carefully considered the rival contentions and perused the orders of the lower authorities. The learned Assessing Officer disallowed commission expenditure paid by the assessee at 4% to various parties, holding that 2% commission was sufficient for the assessee’s business. It is undisputed that the assessee paid commission at 4%, mostly to relatives. However, it is not the case of the learned Assessing Officer that the commission expenditure was non-genuine or merely booked in the names of relatives. The partial disallowance itself indicates that services were rendered and that the nature of the commission was not disputed by the Revenue. The only issue is the reasonableness of the payment. The learned Assessing Officer concluded that 2% commission was sufficient, but no basis or supporting material was placed on record to show that only 2% commission was paid in this line of business. The disallowance is therefore ad hoc and unsupported by evidence. Accordingly, we do not find the disallowance sustained by the learned CIT(A) to be justified. The learned Assessing Officer is directed to delete the disallowance of commission expenditure of ₹26,23,350.
11. Coming to the second issue, namely the disallowance of interest expenditure, we find that Shri Deepak Jain, to whom interest was paid at 18%, is not a related party. Therefore, section 40A(2)(b) of the Act could not have been invoked. Further, the assessee has shown that the loan was unsecured and that a secured loan from the State Bank of India carried interest at 17.10%. When interest on a secured loan was 17.10%, interest at 18% on an unsecured loan from an unrelated party cannot be regarded as excessive or unreasonable. The disallowance therefore fails because the payee is not covered by section 40A(2)(b), and, in any event, the rate of interest is comparable with the rate paid on the assessee’s secured loan. Accordingly, the disallowance of ₹95,928 is not sustainable, and the learned Assessing Officer is directed to delete the same.
12. As we have decided the two substantive grounds relating to the disallowances in favour of the assessee, the remaining grounds are either consequential or general in nature and do not require separate adjudication by a speaking order. They are therefore dismissed.
13. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 20thJuly, 2026.
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