Income Tax Appellate Tribunal - Delhi
Supreme Collections (I) (P) Ltd. vs Dy. Cit on 27 June, 2005
Equivalent citations: [2006]7SOT91(DELHI)
ORDER
1. The Assessee has filed this appeal against the order of the Commissioner of Income Tax (Appeals) passed in Appeal No. 87/2003-04, dated 9-7-2004 on the following effective ground :
"That on facts and in the circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 2,51,725 on account of commission paid to Multiple Web Solutions Private Limited."
2. Briefly stated the facts relating to the issue involved in this ground of appeal of the assessee are that the assessee has claimed payment of commission of Rs. 2,51,725 to M/s. Multiple Web Solutions (P) Ltd. @ 3 per cent on the sales amounting to Rs. 83,90,835. The assessing officer on persistent queries to the assessee and on examination of details found that this payment was not in fact a payment for commission, but was a payment for advertisement of the product of the assessee on the website of this company. He also noticed that through this so-called advertisement on the website not a single sale was affected by the assessee. He further noticed that even a single query through E-mail or otherwise regarding the sale/purchase of the products traded by the assessee-company was received by the assessee. There was no written agreement or understanding between the assessee-company and the website advertiser. Thereafter the assessing officer observed that the assessee has not been able to establish any nexus between the sales and the payment of so-called commission to M/s. Multiple Web Solutions (P) Ltd. and so he disallowed the payment of Rs. 2,51,725 claimed by the assessee as a business expenditure in the form of commission paid to M/s. Multiple Web Solutions (P) Ltd.
3. Aggrieved with the order of the assessing officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) and contended before him that the general principle for allowing deduction under section 37 of the Income Tax Act, 1961 (hereinafter referred to as the Act) was whether the expenditure has been incurred for the purpose of business or not so it was beyond the jurisdiction of the assessing officer to decide whether such expenditure has resulted in any business promotion. On the contrary, the sales of the assessee had considerably increased from the previous assessment year, which is a clear indication that the advertisement had helped the assessee in its business promotion. He further submitted that once the assessing officer has admitted that the assessee had advertised its products on the website, it was beyond his jurisdiction to decide whether the expenditure incurred for the purpose of business or not. After considering these submissions, the learned Commissioner of Income Tax (Appeals) by passing a detailed order upheld the impugned disallowance made by the assessing officer, but mainly on the reasoning that the assessee has failed to establish any nexus between the payment of commission with the sales of the product of the assessee.
4. Before me, the learned authorised representative for the assessee, reiterated the same submissions as were made before the Commissioner of Income Tax (Appeals) and in addition thereto he relied on his written submissions filed before the Tribunal.
5. On the other hand, the learned Departmental Representative for the revenue, placing reliance on the reasoning given in the orders of the tax authorities below and further placing reliance on the decisions of Hon'ble Gujarat High Court reported in Commissioner of Income Tax v. Navsari Cotton & Silk Mills Ltd. (1982) 135 ITR 546 (Guj) and that of the Apex Court reported in Lachminarayan Madan Lal v. Commissioner of Income Tax (1972) 86 ITR 439 (SC) and submitted that the tax authorities below have rightly disallowed the impugned expenditure claimed by the assessee.
6. I have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax authorities below as well as the case law relied upon by the learned Departmental Representative for the revenue.
7. In the instant case the assessee paid a commission of Rs. 2,51,725 to a website for advertisement of the products @ 3 per cent of the total sales of the assessee. Undisputedly not even a single query through E-mail or otherwise was received regarding the sales made by the assessee on account of so-called 'advertisement' on the website. It also remained undisputed that not a single sale has been effected through the website company. It is a settled law that for an expenditure to be eligible to deduction under section 37 of the Act the expenditure should have been incurred wholly and exclusively for the purposes of the business of the company. In Navsari Cotton & Silk Mills Ltd.'s case (supra) their Lordships laid certain essential conditions for allowing an expenditure under section 37 of the Act as business expenditure and one of those essential conditions was that it must be laid out or expended wholly or exclusively for the purpose of business or profession. In this very decision in order to see whether such conditions are fulfilled one of the tests laid down by their Lordships was that the expenditure should have been incurred with a view to bring profits or monetary advantage either today or tomorrow and the other test laid down by their Lordships was where the expenditure was such as a wise, prudent, pragmatic an ethical man of the world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits. Another test laid down by their Lordships was that the expenditure must not be unreasonable and out of proportion and lastly, it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith. The Apex court in Lachminarayan Madan Lal's case (supra) in order to see whether the commission paid by the assessee was properly deductible under section 37 of the Act, made the following observations :
"The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income Tax Officer to hold that the payment was made exclusively and wholly forthe purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is st it) open to the Income Tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act."
Now keeping in view the principles laid down by their Lordships in the cases (supra), I proceed to decide the issue under consideration before me.
8. From the principles laid down by the Hon'ble Lordships, it is clear that for an expenditure to be eligible to deduction under section 37 of the Act there must be direct nexus between the expenditure and the purpose of the business from which it could be ascertained that the expenditure was wholly and exclusively laid out or expended by the assessee for the purpose of business. In the instant case, no written agreement pertaining to the terms of payment between the assessee and the website company has been filed on record nor there is any such agreement executed between the parties. The assessee had paid the commission or the advertisement charges to the website company @ 3 per cent of the total sales when not even a single query or sale was affected through the website company on account of the advertisement on the website. The assessee has not been able to explain before us any of the reasons to justify the payment @ 3 per cent of the total sales made to the website in these facts and circumstances. The assessee has also not been able to disclose before me as to what is the intimate connection between the expenditure incurred and the business carried on by the assessee except mentioning that on account of this advertisement the total sales of the assessee have increased in the year under consideration, however, the reason given by the assessee is de void of any merit because through the website advertisement admittedly neither any query was received nor any sale was affected. Hence, the assessee is not able to establish the genuineness of the expenditure. I am of the opinion that no prudent person in the world of business would agree to make the payment @ 3 per cent on total sales irrespective of the fact whether the same are effected through the website advertisement or not. In the existing facts and circumstances, the expenditure incurred by the assessee appears to be most un-reasonable and out of proportion, however, the fact remains that in the instant case the authorities below have not disputed the expenditure incurred by the assessee. On the other hand, it also cannot be said that on account of the advertisement given by the assessee on the website, the increase in the business of the assessee was not affected or that the business of the assessee has not derived any benefit at all from the advertisement. Considering all the facts, I am of the opinion that the tax authorities below were not justified in disallowing the entire expenditure claimed by the assessee in this regard. However, keeping in view the facts and circumstances of the instant case, in my opinion, it would be fair and reasonable to allow deduction to the extent of Rs. 1,00,000 to the assessee against the claim of Rs. 2,51,725 made by the assessee.
9. In view of the finding given here in above by me, the impugned order of the Commissioner (Appeals) stands modified to this extent and the ground of appeal taken by the assessee, is partly allowed.
10. In the result, the appeal filed by the assessee, is partly allowed.