ITAT Surat Deletes ₹8 Lakh HUF Commission Disallowance

Lalitadevi Deepchand Jain Vs ITO (ITAT Surat)

Related to Each Other, Not to the Taxpayer: ITAT Deletes ₹8 Lakh HUF Commission Disallowance

The Disallowance Rested on Incorrect Assumptions

Can commission paid to an HUF be rejected because the Assessing Officer doubts its business setup and assumes that it is related to the taxpayer? In this case, the Surat Tribunal examined the underlying records and found that the factual premises supporting the disallowance were incorrect.

The Tribunal deleted ₹8,00,001 paid to two HUFs after considering the commission details, their connection with loan disbursements, TDS certificates and the recipients’ disclosed business activities. The decision illustrates why the identity and business records of commission recipients must be examined before drawing adverse conclusions.

A Loan-Sourcing Business and Its Commission Expenses

The assessee operated as a Direct Selling Agent, sourcing customers for loans offered by banks and financial institutions. For assessment year 2018–19, she filed her return declaring total income of ₹8,09,070.

Her business turnover was ₹92,94,594, with a declared net profit of ₹8,04,361. She claimed commission expenditure of ₹25,02,434 and consultancy expenditure of ₹8,73,384.

The original scrutiny assessment accepted the returned income. Subsequently, the Principal Commissioner invoked Section 263, holding that the commission claim had not been substantiated during the revision proceedings. The assessment was set aside with directions to undertake a fresh examination.

The resulting assessment dispute concerned commission of ₹5,00,001 paid to Abhishek Bhutra (HUF) and ₹3,00,000 paid to Ghishulal Bhutra (HUF).

Why the Assessing Officer Rejected the Payments

During the fresh proceedings, the Assessing Officer sought agreements, particulars of services rendered and supporting documents for the two payments.

The assessee explained that the HUF members had collectively undertaken the activity of procuring clients and earning commission. She also submitted that a small referral business did not require a fixed physical office.

The Assessing Officer nevertheless proceeded on the premise that an HUF could not earn commission or consultancy income without an exclusive office or business setup with employees. He also treated the two HUFs as related to the assessee and referred to the absence of certified contracts.

The entire ₹8,00,001 was disallowed, increasing the assessed income to ₹16,09,071. The Commissioner (Appeals) upheld the assessment.

The Relationship Was Misunderstood

Before the Tribunal, the assessee clarified a crucial distinction: four commission recipients were related to one another, but were not related to her.

Those four recipients comprised two individuals and the two HUFs. The Assessing Officer had allowed the commission paid to the individuals while rejecting the payments to the HUFs.

The assessee therefore challenged both the factual assumption about the relationship and the differing treatment of the payments. A relationship among recipients could not, by itself, establish that they were related to the taxpayer.

The Revenue continued to support the assessment, referring to the alleged relationship, the common address and the claimed absence of information about the HUFs’ businesses.

The Supporting Records Went Beyond Payment Entries

The assessee submitted that the commission was paid through account-payee banking channels, with TDS under Section 194H, and was disclosed in the recipients’ income-tax returns.

She also produced particulars showing that both HUFs earned commission from other parties. Abhishek Bhutra (HUF) disclosed total commission income of ₹8,80,803, including ₹3,80,802 from other parties, and salary expenditure of ₹4,17,320.

Ghishulal Bhutra (HUF) disclosed total commission income of ₹5,55,670, including ₹2,55,670 from other parties, and salary expenditure of ₹1,50,000.

These particulars were relied upon to contest the assumption that the HUFs had no employees or identifiable business activity. Their financial statements and return particulars formed part of the supporting material placed before the Tribunal.

The Tribunal Deletes the Addition

After examining the records, the Tribunal found that the two HUFs were not directly related to the assessee. It also considered the details linking the commission payments with loan disbursements and the commission earned by the assessee, supported by detailed TDS certificates.

The recipients’ returns identified their business activities as commission agents, commodity brokers and auctioneers. Consequently, the Assessing Officer’s finding that their business had not been identified was held to be incorrect.

The Tribunal concluded that the disallowance sustained by the Commissioner (Appeals) was unjustified. It deleted the addition of ₹8,00,001 and allowed the appeal. The matter was not remanded for another examination.

Author’s Comments

The practical lesson is that a commission claim must be tested against the actual business evidence. Here, the mistaken relationship assumption and the assertion that the recipients had no identifiable business weakened the assessment’s foundation.

The ruling should not be read as making banking payments or TDS certificates conclusive proof of every commission claim. The Tribunal considered a combination of records, including the connection with loan disbursements and the recipients’ disclosed business activities.

For taxpayers using referral agents, maintaining service particulars, transaction links, payment records and relevant recipient information can be decisive. This case demonstrates how a properly documented factual explanation can overturn a disallowance founded on assumptions.

FULL TEXT OF THE ORDER OF ITAT SURAT

The appeal filed by the assessee is against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short “CIT(A)”] dated 24.06.2025 for the Assessment Year (in short “AY”) 2018-19.

2. The assessee has raised the following grounds of appeal:

“1. That on facts and in law, the learned CIT(A) erred in confirming the disallowance of Rs 8,00,001/- paid as commission to Abhishek Bhutra (HUF) and Ghishulal Bhutra (HUF), despite the genuineness of payments being established through banking channels, TDS deduction, and the recipients filing their respective income tax returns declaring such commission income.

2. That on facts and in law, the learned CIT(A) erred in upholding the disallowance solely on the absence of formal written agreements and physical office setup with employees, ignoring settled legal principles that:

• • Written agreements are not mandatory to establish genuineness of business transactions
  • HUFs have legal capacity to conduct business and earn commission income without mandatory physical office infrastructure

3. That on facts and in law, the learned CIT(A) violated principles of natural justice by dismissing the appeal without adequately considering the appellant’s detailed written submissions, documentary evidence along with the judicial precedents, thereby arriving at a predetermined conclusion without proper adjudication.

4. That on facts and in law, the learned CIT(A) erred in:

• • Failing to apply principles of commercial expediency under Section 37(1) of the Income Tax Act
  • Not considering that engaging commission agents is a legitimate business decision
  • Ignoring that the payments were wholly and exclusively for business purposes
  • Creating inconsistency by allowing similar commission payments to other parties while disallowing payments to HUFs without justified distinction.

5. The appellant craves leave to add, alter, amend, substitute or modify any of the above grounds of appeal at the time of hearing or thereafter as may be necessary in the interest of justice.”

3. The assessee filed return of income on 06.10.2018 for the AY 2018-19 declaring total income of Rs.8,09,070/-. The case was selected for CASS scrutiny to verify the issue of business expenses. Order u/s.143(3) r.w.s 143(3A) & 143(3B) of the Income Tax Act, 1961 (in short “the Act”) was finalized accepting the returned income. The assessee has claimed commission expense of Rs.25,02,434/- during the year. The assessee is registered with various Financial Institution or Bank or Direct Selling Agents (DSA) and engaged in business of procure clientele for these Institution, Banks for various types of loans. The assessee has shown total turnover of Rs.92,94,594/- and has declared net profit of Rs.8,04,361/-. In addition to commission expense of Rs.25,02,434/-, the assessee has claimed consultancy expenses of Rs.8,73,384/-. It was noticed that the assessee had paid commission to six (6) parties out of which four (4) parties are related to each other and residing at same address i.e. A-2, 303, Shyam Villa, VIP Road Surat (apart from rented office). Out of these four parties, which are related to each other, 2 parties are having tax status as HUF. The Assessing Officer (in short “the AO”) has allowed the commission expensesof Rs.8,00,000/-. Proceedings u/s. 263 of the Act was initiated by the Pr. CIT-1, Surat. As the assessee failed to substantiate her claim of commission expenses during the proceedings u/s. 263 of the Act, the Pr. CIT-1, Surat passed order u/s. 263 of the Act on 13.03.2023 holding the assessment order erroneous and prejudicial to the interest of Revenue and set aside the matter to the file of the AO with a direction to pass fresh assessment order. Subsequently, the assessment proceedings u/s. 143(3) r.w.s. 263 of the Act was initiated vide notice u/s. 142(1) of the Act dated 06.01.2024 requesting the assessee to furnish relevant documentary evidences for allowability of her claim of commission expenses of Rs. 8,00,001/- paid to Shri Abhishek Bhutra (HUF) and Shri Ghishulal Bhutra (HUF) during the year under consideration and was requested to submit copy of agreement and nature of services rendered by the above persons and other relevant details/documents with regard to the issue involved. The assessee responded stating that the members of HUF have collectively agreed to engage in the business of procuring clients and earning income on a commission basis. Also, their nature of business, being a small scale does not necessitate the establishment of a fixed physical office space. The AO came to a conclusion that HUF could not have any income in the form of commission or consultancy unless it has an exclusive office or business set up with employee. In the instant case, both HUFs are not having any separate business premises or office set up with employees. Moreover, both HUFs are related to the assessee. Further, the assessee has failed to provide certified copies of contracts either consolidated or separately. The assessee also failed to substantiate the fact that these HUF(s) are having separate business premises or office set up with employees. Hence the AO computed the total income as below:

4. Being aggrieved by the assessment order, the assessee filed the appeal before CIT(A). The CIT(A) dismissed the appeal.

5. The Ld. Authorised Representative (in short “Ld. AR”) for the assessee submitted that the assessee paid commission expenses and deducted TDS on the same in respect of commission expenditure paid to two HUFs i.e. Shri Abhishek Bhutra (HUF) and Shri Ghishulal Bhutra (HUF). The assessee is a registered direct selling agent registered with various financial institutions/banks and is engaged in business of procuring clientele for these institutions for various loans. The Ld. AR further submitted that both Shri Abhishek Bhutra (HUF) and Shri Ghishulal Bhutra (HUF) are not related to the assessee, therefore the observation of the AO that these are related parties to the assessee is incorrect fact. However, out of the parties to whom commission was paid by the assessee during the year, four parties comprising two individuals and the aforesaid two HUFs are related to each other and not to the assessee. The assessee further submitted as under:

“The Appellant is a DSA engaged in sourcing loan cilentele for banks and financial Institutions. Both HUFs rendered genuine referral/business services to the Appellant. for which the commission stated below was paid through account-payee banking channels, after deduction of TDS under Section 194H, evidenced by form 16A and reflected in the recipients Form 26AS.

Both HUFs have duly disclosed this very income in their returns filed under their own PAN, duly accepted by the Department. The relevant figures, together with the Paper Book page references, are as under:

From the aforesaid table, your Honours would appreciate that both HUFs had earned commission income not only from the Appellant (an unrelated party) but also from other parties, and had incurred salary expenditure during the year. These facts clearly indicate that the HUFs were engaged in carrying on commission activities with the assistance of manpower and, therefore, the observation of the learned AO that the HUFs had no employees is not supported by the material available on record.

The party-wise break up of the total commission of Rs.25,02,434/- paid by the Appellant to all six parties during the year is tabulated below:

The Ld. AR further submitted without prejudice to the earlier submissions that even if assuming that the details of commission paid to Shri Abhishek Bhutra (HUF) and Shri Ghishulal Bhutra (HUF) and treating the same as additional material, the Tribunal has the power under rule 29 of the Income Tax Appellate Tribunal Rules, 1963 to take the same on record. The Ld. AR submitted that the commission paid to the two HUFs which are not related to the assessee represents genuine business expenditure, duly evidenced through banking channel, TDS compliance and mutual disclosures and independently corroborated by each HUF’s own commission, income, salary and expenditure.

6. The Ld. Departmental Representative (in short “Ld. DR”) submitted that the assessee at the time of assessment proceedings has not given the details as to what business these two parties are conducting besides this, these are the members related to the assessee and there is no separate address mentioned to these two parties. The Ld. DR relied upon the assessment order and the order of the Ld. CIT(A).

7. We have heard both the parties and perused all the relevant materials available on record. From the perusal of the details of commission paid to Shri Abhishek Bhutra (HUF) and Shri Ghishulal Bhutra (HUF) prima-facie it appears that these two parties are not related to the assessee and details of commission paid in respect of loan disbursal amount and commission earned by the assessee by loan disbursement of details by the assessee with the detailed TDS certificates. From the perusal of records it appears that the assessee is paying the commission income to these two parties which are not related directly to the assessee and therefore the addition made by the AO and confirmed by the CIT(A) are not justified. The finding of the AO that these parties’ business was not identified by the AO appears to be not justifiable as from the perusal of paper book these parties are specifically given the nature of business in their ITR that they are commission agents, commodity brokers and auctioneers. Thus, the finding given by the AO is not correct and addition made therein needs to be deleted. Hence, the appeal of the assessee is allowed.

8. In result, the appeal of the assessee is allowed.

Order pronounced in the open court on 06.10.2026