1. Assessee is a partnership firm. At the relevant time, it was engaged in the business of trading of chemicals which are primarily used in textile process. It has filed its return of income on 21.9.2009 declaring total income at Rs.14,60,263/- . The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and serve upon the assessee. After scrutiny of the accounts, the ld.AO has passed assessment order under section 143(3) of the Act on 14.12.2011. He made following disallowance and computed the income of the assessee at Rs.72,89,651/-. The computation made by the AO reads as under:
|Total income, as per return of income filed by the assessee.||Rs.14,60,263|
|1. Disallowance of commission||Rs.31,78,965|
|2. Disallowance Salary expenses.||Rs. 13,49,415|
|3. Disallowance of salary exp. For non-pa yment of TDS||Rs.2,40,000/-|
|4. Disallowance of Partner salary||Rs. 10,61,008/-|
|Total assessed income|
2. Dissatisfied with the disallowance, the assessee carried matter in appeal before the ld.CIT(A) who deleted all these dis allowances.
3. salary expenses and 10,61,008/- out of partners’ salary. Before adverting to the facts highlighted by the AO for making these dis allowances and re-appreciating order of the ld.CIT(A) for deleting these dis allowances, we would like to bear in mind certain basic principles required to be applied whenever an adjudicating authority is being called to appreciate the allowance and dis allowance of the expenditure claimed by the assessee for its business purpose. It is pertinent to observe that in order to claim expenditure under section 37(1) of the Income tax Act, the assessee is required to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenditure of the assessee, and (d) expenditure must be laid out or expended wholly and exclusively for the purpose of business or profession. The expression “wholly” employed in section 37 refers to quantification of expenditure while expression “exclusively” refers to the motive, objective and purpose of the expenditure. In order to appraise ourselves as to how the concept of commercial expendency and business needs are to be appreciated, while considering the allowance or dis allowance of expenditure claimed by an assessee, we would like to make reference to the judgment of the Hon’ble Gujarat High Court in the case of Voltamp Transformer Pvt. Ltd. Vs. CIT, 129 ITR 105 (Guj). The following observations are worth to note:
“So far as the questions of commercial expediency and business need of an organization are concerned, it is not the view point of a revenue officer which should count, but it should be the view of an ordinary businessman dealing with a situation like the one faced by the assessee.”
In a similar circumstance, the Hon’ble Delhi High Court had an occasion to examine aspect of commercial expediency considered by a businessman while incurring any expenditure. The Hon’ble Delhi High Court has made the following observations on this aspect in the decision of the CIT Vs. Dalmia Cement Ltd., 254 ITR 377.
“An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term “commercial expediency” is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue (see CIT v. Walchand and Co. (P.) Ltd. ; J. K. Woollen Manufacturers v. CIT; Aluminium Corporation of India Ltd. v. CIT and CIT v. Panipat Woollen and General Mills Co. Ltd.
4. Let us first consider the facts discussed by the Revenue authorities below. As far as first issue is concerned,i.e. disallowance of commission paid by the assessee. It emerges out from the record that the assessee has paid commission to 12 persons and it ranges between 6% to 15% of the sales made through them. The AO has disallowed this commission on the ground that in textile business, the commission ranges in between 1% to 3% whereas in the case of assessee the rate of commission is as high as 15.25%. The second reason in the mind of the AO is that person to him commission was paid in last assessment year not paid during this assessment year. The next reason considered by the AO is that outstanding debtors at the end of the year were at 1,38,67,850/-. At the rate of 15% commission payable on this outstanding debts would be around 20.8 lacs whereas brokerage shown as outstanding is Rs. 13.37 lakhs only. The cumulative setting of all these three facts persuaded the AO to disbelieve incurrence of expenditure, and he accordingly disallowed. The ld.CIT(A) deleted these disallowance on the ground that reference made by the AO are of general nature. He did not point out specific defects. Accordingly, the ld.CIT(A) deleted the dis allowance.
5. On due consideration of the above facts and circumstances, in the light of the proposition laid down by two decisions viz. in the case of Voltamp Transformer Pvt. Ltd. and CIT Vs. Dalmia Cement Ltd., (supra), we find that the assessee has filed confirmation. It has disclosed various details of commission recipients; it has disclosed sales made through such persons and also disclosed rate of commission. In other words, the assessee has submitted complete basic details. The ld.AO has re-appreciated these details, but he could only point out defects in the details. He disallowed the commission payment on the basis of general practice i.e. commission payment ranges in between 1% to 2% in this line of business. Such an issue will differ on case to case basis. The AO has not made reference to any other assesses. More so, when the assessee has established business, he might not be required to pay commission, but a new entity in the process of its establishment might have paid higher rate of commission. The ld. AO failed to give any specific defects. The reference to market rate of commission has no bearing to test the genuineness of the expenditure incurred by an assessee. The ld.CIT(A) has rightly appreciated the circumstances and rightly deleted.
As far as salary expenses are concerned, the ld.AO was of the view that the assessee was not required 21 employees. Again we are of the view that this aspect ought to be left to the requirement of businessman. As far as outstanding salaries are concerned, the assessee has pointed out that on account of financial crunch, salary could not be paid in the first view monthly, and ultimately all arrears were cleared. This was not such a strong circumstance which can doubt the existence of employer-employee relationship between assessee and its staff. Therefore, we do not any merit in ground no.2 also. It is rejected.
As far as disallowance of salary paid to the partner is concerned the ld.AO has disallowed the salary paid to two female partners on the ground that one of them is a simple graduate and she might not be having day-to-day knowledge of business. The ld.CIT(A) has deleted this disallowance by observing that one of the female partner was doing chemical business since 1999 and she had been filing income-tax return. Other lady partner has also B.Com. graduate. The AO has drawn inference without anything on record. On due consideration of the above facts and circumstances, we are of the view that the ld.CIT(A) has rightly deleted the dis allowance. It is also pertinent to observe that salary to the partner is being regulated by the provisions of section 40(b) of the Income Tax Act. It is to be paid in accordance with the provision stipulated in the deed which should be in commensurate with the provisions of section 40(b) of the Income Tax Act. On such salary payment, provisions of section 40 A(2) cannot be invoked. On due consideration all the facts, we do not find any merit in these grounds of appeals. They are dismissed.
6. In the result, the appeal of the Revenue is dismissed.