Economical Life Freedom Pvt. Ltd. Vs ITO (ITAT Mumbai)
SECTION 37(1): AO CANNOT FIX COMMISSION BY INDUSTRY “FEELING”—30% AD HOC DISALLOWANCE DELETED WHEN NOT ONE PAYMENT WAS FOUND BOGUS
Referral business naturally travels with commission
The assessee-company was engaged in trading health cards, magnetic bracelets & gas-safety products.
Its business operated through a referral or multi-level marketing model. Membership was given to purchasers, who earned commission for referring new customers. As the membership chain expanded, commission became payable at different levels.
The assessee filed its return declaring total income of ₹4,41,770. The case was selected for limited scrutiny under CASS principally because of large commission expenditure & comparatively low net profit.
During the year, the assessee debited commission expenditure of ₹68,83,823, representing approximately 35.42% of its sales.
528 recipients—but only four confirmations
During the assessment, the assessee furnished a list of 528 commission recipients.
The assessment order itself recorded that TDS had been deducted in 80 cases involving aggregate commission of ₹55,42,604. In the remaining cases, TDS was not deducted because the individual payments were stated to be below the applicable statutory threshold.
The assessee explained its referral-based business model & furnished details of the commission payments.
The AO nevertheless observed that complete party-wise evidence linking each commission payment with the corresponding referral or business generated had not been produced. He also noted that confirmations from only four recipients were furnished.
