Case Law Details
Smt. Suman Prakash Utekar Vs ACIT (ITAT Mumbai)
The Mumbai ITAT set aside the disallowance of ₹95.81 lakh commission expenditure, holding that mere non-response to notices u/s 133(6) cannot justify addition without proper verification, and restored the matter to the AO for fresh examination.
The AO had:
- Disallowed commission expenses u/s 68 due to non-response by parties,
- Ignored that payments were made through banking channels with TDS deduction u/s 194H,
- Made further ad-hoc disallowances @20% on various expenses.
The CIT(A) upheld the additions, stating that:
- Cheque payments and TDS do not prove genuineness,
- Assessee failed to establish identity and business purpose of payees.
However, the ITAT observed:
- Books were audited and not rejected,
- Assessee had shown substantial profit (40%),
- AO failed to properly consider documentary evidence and explanations,
- Natural justice requires opportunity to substantiate claim.
Accordingly:
- Issue of commission disallowance was remanded to AO for fresh verification,
- Assessee directed to furnish supporting evidence and cooperate.
On ad-hoc disallowances:
- ITAT held 20% excessive and arbitrary,
- Restricted disallowance to 10%, balancing lack of full evidence with business reality.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The instant appeal of the assessee filed against the order of the NFAC, Delhi [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Year 2011-12, date of order 04.12.2025. The impugned order emanated from the order of the Ld. Assistant Commissioner of Income Tax Circle 21(3), Mumbai (for brevity the ‘Ld. AO’) order passed under section 143(3) r.w.s. 147 of the Act date of order 24.12.2018.
2. The assessee has taken the following grounds:
- “That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Commissioner of Income-tax (Appeals) [‘CIT(A)’] under section 250 of the Income-tax Act, 1961 against the impugned order passed by the Learned Assessing Officer [‘AO’] under section 143(3) r.w.s. 147 of the Income Tax Act is bad in law and on facts.
- The Learned Assessing Officer erred in making addition of Rs. 95,81,356 by treating commission expenditure as unexplained under section 68 of the Act. without appreciating that section 68 has no application to business expenditure duly recorded in the books of account
- The Learned Assessing Officer failed to appreciate that the commission expenditure was incurred wholly and exclusively for the purposes of business and was allowable under section 37(1) of the Act, the payments having been made through account payee cheques after deduction of tax at source under section 194H.
- The Learned Assessing Officer erred in drawing adverse inference merely on the basis of non-response to notices issued under section 133(6), despite complete details of payees being furnished. Such non-response cannot be a ground to disallow genuine expenditure.
- The Learned Assessing Officer erred in making an ad-hoc disallowance of 20% of conveyance and travelling expenses amounting to Rs. 3,32,371, without pointing out any specific defect or non-business use. Such ad-hoc disallowance is unsustainable in law.
- The Learned Assessing Officer further erred in making ad-hoc disallowance of Rs. 1,23,858 being 20% of postage, telephone, printing & stationery. miscellaneous and meeting expenses, without rejecting the books of account or identifying any non-business expenditure
- The Learned Assessing Officer erred in initiating penalty proceedings under sections 271(1)(c) and 271F of the Act, which is premature, unjustified and bad in law, particularly when the quantum additions themselves are unsustainable.
- The appellant does not press the ground relating to disallowance of 15% of vehicle expenses and 10% depreciation, as accepted during assessment proceedings.
- The appellant craves leave to add to, amend, alter or withdraw any of the above grounds at or before the time of hearing.”
3. The brief facts of the case are that the assessee was carrying commission business and filing the return on regular basis. During the impugned assessment year the assessee filed the return and declared total income Rs.1,77,10,130/-. During the assessment proceeding the Ld. AO had made the addition amount to Rs.1,01,64,312/- as disallowance of expenses. During the impugned assessment year the assessee earned commission amount of Rs.4,17,77,051/- and declared net profit Rs.1,68,43,210/- after claiming the expenses related commission payment amount of Rs.2,02,55,098/- and other expenses. The Ld. AO during assessment proceeding had issued notice u/sec. 133(6) related to the commission paid by the assessee. Out of the total commission payment amount to Rs.95,81,356/- had not complied notice u/sec. 133(6) of the Act. The Ld. AO further, disallowed the expenses at the rate of 20% on the expenses incurred Rs.16,61,855 which comes total amount to Rs.3,32,371/- and related disallowance of expenses for convenience and travelling incurred amount to Rs.1,34,569/- and Rs.43,614/- respectively. But related to disallowance of vehicle expenses and depreciation the assessee had not pressed the ground. The Ld. AO disallowed the following expenses at the rate of 20% related to the expenses incurred by the assessee in following heads:
- Postage &Telephone : Rs.1,34,075
- Printing &Stationery : Rs.3,65,274
- Miscellaneous Expenses: Rs.48,251
- Meeting Expenses: Rs.71,690/-
Considering this the 20% of the expenses which comes to Rs.1,23,858/- was disallowed on ad hock basis and added back with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) considered the submission of the assessee but rejected the appeal of the assessee. Being aggrieved assessee filed an appeal before us.
4. The Ld. AR submitted that a paper book comprising pages 1 to 37 has been filed and placed on record. With regard to the disallowance of commission expenditure amounting to Rs.95,81,356/-, the Ld. AR contended that the assessee had incurred total commission expenses of Rs.2,02,55,098/- against commission income of Rs.4,17,77,051/-. It was further submitted that all commission payments were made through account payee cheques after due deduction of tax at source under section 194H of the Act, and the same are duly reflected in the books of account. The Ld. AR invited our attention to pages 1 to 14 of the APB, which contain copies of the return of income, financial statements, and the Tax Audit Report in Form Nos. 3CB and 3CD under the Income-tax Rules, 1962. It was emphasized that the books of account have been duly audited by a Chartered Accountant in accordance with the provisions of section 44AB of the Act.
The Ld. AR further submitted that the Ld. AO made the impugned addition without rejecting the books of account, merely on the basis of non-compliance with notices issued under section 133(6) of the Act. During the course of assessment proceedings, the assessee had furnished complete details of the commission payments, which are placed on record at pages 20 to 23 of the APB. It was contended that no reasonable opportunity was afforded to the assessee to furnish further details as may have been required by the Ld. AO. Accordingly, the Ld. AR prayed that the matter be restored to the file of the Ld. AO for verification of the disallowance of Rs.95,81,356/-.
5. The Ld. DR, on the other hand, supported the orders of the revenue authorities. It was submitted that notices issued by the Ld. AO under section 133(6) of the Act remained uncomplied with by the concerned parties, thereby casting doubt on the genuineness of the commission payments. The Ld. DR contended that the absence of compliance indicates lack of substantiation regarding the purpose and authenticity of such payments. The Ld. DR further drew our attention to the findings recorded in the impugned appellate order, which are reproduced hereunder:
“In Grounds 1, 2 and 3, the appellant has challenged the order passed by AO regarding additions made u/s 68 for unverifiable commission expenses and disallowance of expenses u/s 37 of Income Tax Act, 1961.
In respect of commission paid, the appellant claimed commission expenditure of Rs 2,02,55,098/-. During the assessment proceedings. the AO issued notices u/s 133(6) to all such parties and out of these various parties failed to respond to the notices. The appellant also did not provide any alternative address or any confirmation from these parties. The AO asked the appellant to produce these parties, however, the appellant failed to produce them despite given ample time and opportunities. The AO, therefore disallowed Rs 95,81,356/- and treated it as unexplained expenditure u/s 68.
After examining the assessment record, I am of the opinion that mere payment through banking channels or deduction of TDS does not establish genuineness. It is settled law that the assessee must establish identity, genuineness and business purpose. Cheque payment does not prove genuineness if the recipient is untraceable. Moreover, payment by bank is neither sacrosanct nor can it make a non-genuine transaction as genuine for which reliance is placed on the judgment of the CIT V.Precision Finance (P) Ltd. 208 ITR 465 (Cal.).
Appellant sought reliance on ITAT decision in ACIT v. Anita LahuGhadge (Mumbai Bench), where approx. 40% commission was allowed and ITAT decision in ACIT v. Narayan ShivramKotnis (Mumbai Bench), where disallowance was restricted to 10% only.
However, there is a critical factual distinction in this case from the case laws cited by the appellant which is independent verification done by the AO vide issuance of notices u/s 133(6) to the parties for thorough verification. As per the assessment order, it is clear that notices u/s 133(6) were issued to all the parties to verify their existence. However, various parties were found not traceable as they failed to respond to the said notices. Further, the appellant did not produce any of the parties, nor filed confirmations, affidavits, or alternative addresses of such non tracable parties either during the assessment or appellate proceedings. Thus, case laws cited by assessee are distinguishable.
Considering the failure of the assessee to substantiate the genuineness of commission expenditure and the significant number of unserved / unresponded 133(6) notices, the AO’s action of rejecting these expenses and treating them as unexplained u/s 68 is justified and the addition made by the AO is hereby confirmed.”
6. We have heard the rival submissions and perused the material available on record. Upon consideration of the same, we find that the assessee has earned commission income of Rs.4,17,77,051/- and, in relation thereto, has incurred commission expenditure of Rs.2,02,55,098/-. The assessee has declared a net profit of Rs.1,68,43,210/- in the return of income, which works out to approximately 40% of the total turnover. Thus, it cannot be said that the assessee has disclosed a low net profit ratio in the Profit & Loss Account. On further perusal of the record, it is observed that the books of account of the assessee were duly audited under section 44AB of the Act, and the Tax Audit Report on 24.09.2011 was furnished along with the return of income. It is also noted that the Ld. AO has not rejected the books of account. However, the Ld. AO issued notices under section 133(6) of the Act, and on account of non-compliance by certain parties, made a disallowance of Rs.95,81,356/-.
On the other hand, the assessee has contended that all payments were made through banking channels and that tax was duly deducted at source under section 194H of the Act, which constitutes cogent evidence regarding the genuineness as well as the purpose of the payments. However, the Ld. AO, without adequately considering these aspects, proceeded to make the impugned addition during the assessment proceedings. The Ld. CIT(A) has merely affirmed the action of the Ld. AO without carrying out any independent verification. In these circumstances, we are of the considered view that the assessee was not afforded a reasonable opportunity to substantiate its claim before the Ld. AO. Accordingly, in the interest of natural justice, we restore this issue to the file of the Ld. AO for fresh verification of the disallowance of Rs.95,81,356/- relating to commission payments. Needless to say, the assessee shall be afforded a reasonable opportunity of being heard and shall be at liberty to furnish all relevant documents and evidences in support of its claim. The assessee is also directed to extend full cooperation during the set-aside proceedings. Accordingly, this ground is allowed for statistical purposes.
7. The Ld. AR further contended that the Ld. AO had suo motu made an ad hoc disallowance of 20% towards expenses such as conveyance, travelling, postage and telephone, printing and stationery, miscellaneous expenses, and meeting expenses. It is observed that during both the assessment as well as appellate proceedings, the assessee failed to furnish adequate supporting evidence to substantiate that the said expenses were incurred wholly and exclusively for business purposes. Considering the entirety of the facts and circumstances of the case, we are of the view that a reasonable disallowance would be 10% instead of 20%. Accordingly, we direct the Ld. AO to restrict the disallowance of such expenses to 10%. The Ld. DR did not raise any strong objection to this course of action. Thus, the matter is restored to the file of the Ld. AO with the aforesaid direction.
8. In the result, the appeal of the assessee bearing ITA No.567/Mum/2026 is allowed for statistical purpose.
Order pronounced in the open court on 16th day of April 2026.
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