Income tax - Whether AO has powers u/s 37(1) to go into that aspect of relationships between assessee and auto dealers where commission paid is to be reduced every year merely because it was done in during initial years - NO: HC
By TIOL News Service
NEW DELHI, JUNE 05, 2014: THE issues before the Bench are - Whether the assessing officer has powers u/s 37(1) to go into that aspect of relationships between the assessee and auto dealers where the commission paid is to be reduced every year merely because it was done in the initial years and Whether the fact that the commission payable was 90% in the first year and reduced to some extent in the latter years, is a consideration for the AO to conclude that, it necessarily has to be reduced further in the succeeding year. And the verdict goes in favour of the assessee.
Facts of the case
The assessee is engaged in the business of corporate insurance agency. It conducts business through extensive Maruti dealers’ networks consisting of over 300 sales outlets and 400 dealer workshops spread throughout the country. It was a 100% owned subsidiary of Maruti Suzuki India Ltd, and had a business arrangement with National Insurance Co. Ltd as its licensed corporate insurance agent. It had filed a return for AY 2006-07 declaring an income of Rs.2,66,26,206/-. During assessment, AO issued notice u/s 143 (2) and the assessee filed its reply. The AO held that the assessee had debited Rs. 8,99,89,136/- as commission paid to Maruti dealers, on a total sum of Rs. 6,29,92,395/-. This amounted to 70% of the total receipts of insurance commission. For the preceding years, the payments made to Maruti dealers were 70%, 79% and 93.66%. The AO restricted the commission to 60% and thus disallowed Rs.89,98,913/-. On appeal, CIT(A) allowed assessee's contentions. On further appeal, Tribunal had allowed the appeal on the basi that the revenue’s argument that commission payable during the initial years, after setting up of business might have been warranted, whereas for the AY 2006-07 a decline in such commission could be justified. The matter was remitted for reconsideration to the AO to decide the matter afresh. The assessee had applied u/s 254 (2) seeking rectification of the ITAT’s order, which was eventually allowed on 14.1.2011. The Revenue filed a Writ Petition 2012-TIOL-711-HC-DEL-IT – which was considered by HC and allowed, where it was held that the conspectus of circumstances in the case did not warrant the ITAT’s exercise of jurisdiction for rectification u/s 254 (2). The assessee sought review of that judgment but without avail.
Before HC, the assessee's counsel had contended that CIT(A) had examined the entire records including the fact that for the previous period, i.e., AY 2005-06, the CIT had considered and noticed that the percentage of commissions shared with dealers had been in the range of 93.67%, 79% and 70.09%. It was contended that the Tribunal itself noticed order of 9.10.2009 and upheld the CIT (A)’s factual findings in 2005-06. Arguing against the Tribunal’s findings (that the disallowance in this case made by the AO beyond 60% was unjustified), counsel had submitted that the sole discretion as regards the amount of commission to be given, parted or shared, (being a commercial decision) lies exclusively within the domain of enterprise, i.e., the assessee. So long as the AO was satisfied whether the amounts were actually paid and the expenses incurred were genuine, he cannot question the reasonableness of the amount, on the basis of the percentage being high or excessive.
On the other hand, the Revenue's counsel had urged that apart from the agreement, which broadly contained the condition with respect to the commission sharing, there was no material on the record to indicate that assessee had, in fact, agreed on year to year basis for differing rates of commission. Emphasizing that since the assessee and its dealers were party to a written agreement, the business on this condition, argues the Revenue, was significant. Counsel had also submitted that AO itself possesses the jurisdiction to determine reasonableness of the extent of commission, in the sense that commercial expediency u/s 37 (1) was to be read along with power conferred u/s 40A (2), which requires the factoring of fair market value of similar deductions/expenses.
Held that,
++ this Court has considered the submissions. Whether the parties were required to reduce the rates of commission for each year into writing, in the opinion of the Court, is not an aspect which could have been gone into by the AO. The way parties entering into a voluntary commercial transaction spell out their relationship, is a matter of contract, which except by statutory supervision, the AO cannot go into, at least under Section 37 (1), given that the exclusive domain of deciding whether the expenditure is warranted, is that of the assessee. The decision is entirely a business related one. If the matter is viewed from this perspective, the fact that the commission was 90% in the first year and reduced to some extent in the latter years ipso facto is not a consideration for the AO to have concluded that, it necessarily had to be reduced to 60% for the fourth year, i.e., 2006-07; no support in terms of the contract or expressed provision of law or rules has been cited in support of the AO’s determination in this regard. This Court is also satisfied that TDS payments were made in respect of the dealership commission parted or shared by the assessee, as is evident from the records. In view of the above findings, this Court is of the opinion that the question of law is to be answered in favour of the assessee and against the Revenue. The appeal is accordingly allowed.
(See 2014-TIOL-907-HC-DEL-IT)
