By TIOL News Service

CHANDIGARH, MAR 27, 2014: THE issues before the Bench are - Whether when a close relative of the assessee has been working with him for several years, the huge payment of commission in a particular year can be construed as a subterfuge to reduce tax liablity of the assessee and Whether "nephew" can be considered as a relative as per the provisions of section 2(41). And the verdict goes against the assessee.

Facts fo the case

The assessee, an individual, is engaged in supply and maintenance of sophisticated electronics equipment. He had filed his return of income tax for AY 1989-90 declaring his income as Rs.24,34,593/- which as per revised return was changed to Rs.20,62,310/-. Pursuant to notice issued u/s 148, assessee had filed his revised return on 1.7.1991 finally declaring his income as Rs.26,66,840/-. Thereafter, notices u/s 143(2) and 141(1) were served. The AO after finalizing the assessment vide assessment order, made an addition of Rs.1,74,484/-, interalia, on account of commission paid to one Anil Kumar Gupta. On appeal, CIT(A) affirmed the said addition made on account of commission paid though gave relief with regard to some other additions which had been made by the AO. Agreeing with the order of the CIT(A), Tribunal vide a joint order upholding the re-opening of assessment by the CIT(A), gave no relief to the assessee with respect to the addition made by the AO.

Before the HC, the assessee's counsel contended that the income tax authorities had wrongly construed employment of Anil Kumar Gupta to be that of a relative of the assessee and thus the said authorities were wrongly alarmed by the quantum of commission paid to him. It was further claimed that this wrong approach of the revenue resulted in addition of said commission which had been paid to Anil Kumar Gupta, to income of the assessee. It was claimed that Anil Kumar Gupta was not a relative of the assessee in terms of definition of term “relative” given in Section 2(41). It was urged that when there was no application of provisions of Section 2 (41) to the facts of the case, no resort could be made to provisions of Section 40A (2)(b). It was further urged that income tax authorities were not expected to question quantum of remuneration or commission paid to their employees by the assessee as in the conduct of his business, the assessee was to pay for the skills and acumen of his employees commensurate to their abilities.

On the other hand, the Revenue's counsel had contended that entire evidence given by the assessee qua engagement of Anil Kumar Gupta and payment of huge commission to him was analysed and evaluated by the income tax authorities who then had concurrently come to a finding that payment of commission was not genuine and rather was a camouflage for reducing profits in order to escape liability of taxation.

Held that,

++ after going through the explanation furnished by the assessee and statement of Anil Kumar Gupta, the AO had concluded that there was no change in the duties of Shri Anil Gupta prior to the agreement and thereafter, and right from 1984 onwards till date these only involved liaison work in the Delhi branch. There was no change in his job nor could he improve his qualifications by which it could be said that he had become more useful to the appellant; and the payment of commission to Shri Gupta was a device adopted to save the assessee from the tax liability since Shri Gupta had taken a loan of Rs.7 lacs for the purchase of a plot from the assessee and on which interest had been paid to the appellant and which was sought to be set off by the payment of commission which had merely been credited to the account of Shri Gupta but factually not paid. The AO had also noticed that there was no material on record to prove that there was any contribution made by Anil Kumar Gupta, more than his liaison work which he was already doing, to the assessee's business to justify payment of huge commission to him. It had also been noticed by the AO further that business of the assessee rather had not shown any improvement during the assessment years under consideration i.e. 1989-90 and 1990-91, when huge commission was allegedly paid by the assessee to said Anil Kumar Gupta. It was on the basis of these observations that the AO had disallowed the commission claimed in both the assessment years holding that the commission had been paid on non-business grounds and was a device to reduce the assessee's taxable income. The CIT(A) had also turned down the pleas put forth by the assessee that payment of commission to Anil Kumar Gupta was a compulsion to retain his services for improvement of the business. The CIT(A) had come to a finding that the assessee had failed to prove that Anil Kumar Gupta had contributed anything towards the improvement of the business to justify payment of huge commission to him. When the entire matter was re-agitated before the Tribunal, its observations and findings were no different than the ones given by the AO and affirmed by the CIT(A) on this count. The Tribunal had come to a definite finding that it was not on account of being a nephew of the assessee that he was paid such huge commission. It is also clear that it was well within the cognizance of the Tribunal that a nephew was not included in the term 'relative' as per Section 2(41). This aspect is not at all concerned with regard to rejection of plea of the assessee and with making of addition in his income. It was on entirely different grounds. With regard to reference to these provisions made by the CIT(A), it may be mentioned that even though it has no bearing on final decision of the matter in controversy, the Tribunal has very ably dealt with the entire aspect. Completely being in agreement with the reasons given by the AO and affirmed by the CIT(A) in respect of disallowing the commission paid to Anil Kumar Gupta claimed for these assessment years, the Tribunal had rejected the claim of the assessee on this count;

++ there is no dispute about the law and there cannot be any. Facts of the case in hand, however, are entirely different. When these facts are appreciated in the context as also in the circumstances in which the commission was paid, no support from these judgments is available to the assessee. All the three revenue authorities on facts had come to one and the same conclusion and there is concurrent finding that payment of commission shown in books of accounts of the assessee was merely a subterfuge to reduce the tax liability of the assessee. It is to be noticed that the Tribunal had re-assessed the entire issue and without being influenced by the earlier two concurring findings, had independently also come to a finding that the claim on account of commission by the assessee was not tenable in the assessment years under appeal and that it had rightly been rejected. As the entire issue in these appeals concerns facts and attending circumstances and there is nothing legal much less substantial to be adjudicated upon, no substantial question of law, in fact, arises for consideration in these appeals. The questions posed by the assessee thus need not be answered as the same are based on facts. Consequently, both the appeals, being without any merit, are dismissed.

(See 2014-TIOL-378-HC-P&H-IT)