SUPREME COLLECTIONS (INDIA) (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2005-LL-0627-3]

Citation 2005-LL-0627-3
Appellant Name SUPREME COLLECTIONS (INDIA) (P) LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 27/06/2005
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags business expenditure • written agreement
Bot Summary: Thereafter the AO 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 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 Ltd. Aggrieved with the order of the AO, the assessee filed an appeal before t h e CIT(A) and contended before him that the general principle for allowing deduction under s. 37 of the IT Act, 1961 was whether the expenditure has been incurred for the purpose of business or not so it was beyond the jurisdiction of the AO 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. After considering these submissions, the learned CIT(A) by passing a detailed order upheld the impugned disallowance made by the AO, 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. The apex Court in Lachminarayan Madan Lal s case in order to see whether the commission paid by the assessee was properly deductible under s. 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 ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee s business. 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 the reason given by the assessee is devoid of any merit because through the website advertisement admittedly neither any query was received nor any sale was affected. In the existing facts and circumstances, the expenditure incurred by the assessee appears to be most unreasonable and out of proportion the fact remains that in the instant case the authorities below have not disputed the expenditure incurred by the assessee. 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.


assessee has filed this appeal against order of CIT(A) passed in appeal No. 87/2003-04, dt. 9th July, 2004 on following effective ground: "That on facts and in circumstances of case, learned CIT(A) erred in confirming disallowance of Rs. 2,51,725 on account of commission paid to Multiple Web Solutions (P) Ltd." Briefly stated facts relating to issue involved in this ground of appeal of assessee are that assessee has claimed payment of commission of Rs. 2,51,725 to M/s Multiple Web Solutions (P) Ltd. @ 3 per cent on sales amounting to Rs. 83,90,835. AO on persistent queries to assessee and on examination of details found that this payment was not in fact payment for commission, but was payment for advertisement of product of assessee on website of this company. He also noticed that through this so-called advertisement on website not single sale was affected by assessee. He further noticed that (not) even single query through e-mail or otherwise regarding sale/purchase of products traded by assessee- company was received by assessee. There was no written agreement or understanding between assessee-company and website advertiser. Thereafter AO observed that assessee has not been able to establish any nexus between sales and payment of so-called commission to M/s Multiple Web Solutions (P) Ltd. and so he disallowed payment of Rs. 2,51,725 claimed by assessee as business expenditure in form of commission paid to M/s Multiple Web Solutions (P) Ltd. Aggrieved with order of AO, assessee filed appeal before t h e CIT(A) and contended before him that general principle for allowing deduction under s. 37 of IT Act, 1961 (hereinafter referred to as Act) was whether expenditure has been incurred for purpose of business or not so it was beyond jurisdiction of AO to decide whether such expenditure has resulted in any business promotion. On contrary, sales of assessee had considerably increased from previous assessment year, which is clear indication that advertisement had helped assessee in its business promotion. He further submitted that once AO has admitted that assessee had advertised its products on website, it was beyond his jurisdiction to decide whether expenditure incurred (was) for purpose of business or not. After considering these submissions, learned CIT(A) by passing detailed order upheld impugned disallowance made by AO, but mainly on reasoning that assessee has failed to establish any nexus between payment of commission with sales of product of assessee. Before me, learned Authorised Representative for assessee, reiterated same submissions as were made before CIT(A) and in addition thereto he relied on his written submissions filed before Tribunal. On other hand, learned Departmental Representative for Revenue, placing reliance on reasoning given in orders of tax authorities below and further placing reliance on decisions of Hon ble Gujarat High Court reported in CIT vs. Navsari Cotton & Silk Mills Ltd. (1981) 23 CTR (Guj) 292: (1982) 135 ITR 546 (Guj) and that of apex Court reported in Lachminarayan Madan Lal vs. CIT 1972 CTR (SC) 418: (1972) 86 ITR 439 (SC) submitted that tax authorities below have rightly disallowed impugned expenditure claimed by assessee. I have considered rival submissions of both parties, perused records and carefully gone through orders of tax authorities below as well as case law relied upon by learned Departmental Representative for Revenue. In instant case assessee paid commission of Rs. 2,51,725 to website for advertisement of products @ 3 per cent of total sales of assessee. Undisputedly not even single query through e-mail or otherwise was received regarding sales made by assessee on account of so-called advertisement on website. It also remained undisputed that not single sale has been effected through website company. It is settled law that for expenditure to be eligible to deduction under s. 37 of Act, expenditure should have been incurred wholly and exclusively for purposes of business of company. In Navsari Cotton & Silk Mills Ltd. s case (supra) their Lordships laid certain essential conditions for allowing expenditure under s. 37 of Act as business expenditure and one of those essential conditions was that it must be laid out or expended wholly or exclusively for purpose of business or profession. In this very decision in order to see whether such conditions are fulfilled one of tests laid down by their Lordships was that expenditure should have been incurred with view to bring profits or monetary advantage either today or tomorrow and other test laid down by their Lordships was where expenditure was such as wise, prudent, pragmatic and ethical man of world of business would conscientiously incur with eye of promoting his business prospects, subject to expenditure being genuine and within reasonable limits. Another test laid down by their Lordships was that expenditure must not be unreasonable and out of proportion and lastly, it must not be expenditure merely with view to avoid tax liability without any genuine purpose or reason in good faith. apex Court in Lachminarayan Madan Lal s case (supra) in order to see whether commission paid by assessee was properly deductible under s. 37 of Act, made following observations: "The mere existence of agreement between assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind ITO to hold that payment was made exclusively and wholly for purpose of assessee s business. Although there might be such agreement in existence and payments might have been made, it is still open to ITO to consider relevant facts and determine for himself whether commission said to have been paid to selling agents or any part thereof is properly deductible under s. 37 of Act." Now keeping in view principles laid down by their Lordships in cases (supra), I proceed to decide issue under consideration before me. From principles laid down by Hon ble Lordships, it is clear that for expenditure to be eligible to deduction under s. 37 of Act there must be direct nexus between expenditure and purpose of business from which it could be ascertained that expenditure was wholly and exclusively laid out or expended by assessee for purpose of business. In instant case, no written agreement pertaining to terms of payment between assessee and website company has been filed on record nor there is any such agreement executed between parties. assessee had paid commission on advertisement charges to website company @ 3 per cent of total sales when not even single query or sale was affected through website company on account of advertisement on website. assessee has not been able to explain before us any of reasons to justify payment @ 3 per cent of total sales made to website in these facts and circumstances. assessee has also not been able to disclose before me as to what is intimate connection between expenditure incurred and business carried on by assessee except mentioning that on account of this advertisement total sales of assessee have increased in year under consideration, however, reason given by assessee is devoid of any merit because through website advertisement admittedly neither any query was received nor any sale was affected. Hence, assessee is not able to establish genuineness of expenditure. I am of opinion that no prudent person in world of business would agree to make payment @ 3 per cent on total sales irrespective of fact whether same are effected through website advertisement or not. In existing facts and circumstances, expenditure incurred by assessee appears to be most unreasonable and out of proportion, however, fact remains that in instant case authorities below have not disputed expenditure incurred by assessee. On other hand, it also cannot be said that on account of advertisement given by assessee on website, increase in business of assessee was not affected or that business of assessee has not derived any benefit at all from advertisement. Considering all facts, I am of opinion that tax authorities below were not justified in disallowing entire expenditure claimed by assessee in this regard. However, keeping in view facts and circumstances of instant case, in my opinion it would be fair and reasonable to allow deduction to extent of Rs. 1,00,000 to assessee against claim of Rs. 2,51,725 made by assessee. In view of finding given hereinabove by me, impugned order of CIT(A) stands modified to this extent and ground of appeal taken by assessee is partly allowed. In result, appeal filed by assessee is partly allowed. *** SUPREME COLLECTIONS (INDIA) (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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