ITAT Deletes S. 41(1) Addition against Company in respect of Outstanding Commission payable to its Agent in Kuwait [Read Order]


While hearing the case between Pyramid Consulting Engineers Pvt. Ltd vs. DCIT, Mumbai bench of Income Tax Appellate Tribunal (ITAT) recently deleted the addition made by the Assessing Officer (AO) under section 41(1) of the Income Tax Act 1961 against the assessee-Company in respect of outstanding commission payable to its agent in Kuwait.

The assessee in the present case engaged the business of Oil & Gas industry rendering design and engineering services and services were rendered outside India to the overseas parties in the field of Oil and Gas sector.

During the assessment period, it was noted by the AO that total outstanding payable amounting to Rs. 34,90,058 to a creditor and the details of the said creditor was not specified the assessee. Simultaneously the assessee was asked by the AO whether the said creditor has made any request for clearance of the outstanding payment, but the assessee has failed to furnish proof documents before the AO. Accordingly, the AO treated that the said liability has ceased to exist and the additions were made to the income of the assessee under section 41(1) of the Act under the head cessation of liability.

On appeal CIT(A) also upheld the order pronounced by the AO and confirmed the addition.

Thereafter, the assessee was on further appeal before the Tribunal.

Before the bench council for the assessee, Advocate Devendra Jain submitted that the said creditor was appointed as an agent to procure business for the assessee in Kuwait and also placed a copy of Memorandum of Understanding (MOU) as record which stipulates payment of commission at @ 25% on the businesses which the said agent generated in favour of the assessee which is to be paid on realization of proceed from debtors. It was further submitted that there is payment recovery of Rs. 1,38,36,345 outstanding from the parties from whom the agent generated the business in favor of the assessee in Kuwait and also challenged the applicability of the said section invoked by the lower authorities in the present issue.

After considering the rival submissions of both the parties tribunal bench consists of Judicial Member Mahavir Singh and Accountant Member Ramit Kochar observed that the “assessee had entered into MOU with the agent for procuring business in Kuwait for the assessee. While analyzing the MOU it can understand that said agent is to be paid commission at 25% during the period for the business generated in favor of the assessee and the said sum is payable on the realization by the assessee from the debtors from whom this agent has procured business in favor of the assessee”.

The division bench further observed that while perusing the available material facts it is clear that “the said agent was generating the business from various parties in Kuwait in favor of the assessee from year to year for which commission expenses of Rs. 1,31,61,824 – is stated to payable to the said agent for the relevant financial year. Revenue has not brought on record any evidence to prove that this MOU was not genuine or no commission was payable to the said agent for the business he generated in favour of the assessee in the earlier years”, hence it can be concluded that said commission expenses as per MOU is payable by the assessee to the agent on realization of proceeds from debtors. It is also clear that the said commission is payable only on actual recovery of sale proceeds, consequently, the bench directed the lower authorities to delete addition made by them on account of the outstanding commission payable by the assessee company to its agent in Kuwait.

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