The Orissa High Court has disallowed commission expenses as claimed by the appellant by holding that the appellant was not able to prove the expertise of persons to help him in business to whom the said commission was paid.
The appellant, Oripol Industries Ltd, was engaged in the business of manufacturing and sale of P.P. woven sacks meant for packing of fertilizer and cement etc. It filed its return of income for the said AY on 10th September, 2010 declaring a total income of Rs.1,47,09,311/-. The return was picked up for scrutiny and the statutory notice was sent along with a questionnaire to the Appellant by the Assessing Officer (AO).
While examining the claims of the Appellant, the Assessing Officer disallowed the payment of commission to the tune of Rs. 53,49,790/- and asked the appellant to justify it. The explanation offered by the appellant was that it had obtained an export order for supply of Iron Ore Fines (IOF). The supply was time-bound and had to be made within a short span of time. Since the materials could not be gathered by the Directors of the Company themselves, they engaged their relatives for procurement of quality IOF. For this, the commission was paid to each of them.
Upholding the arguments of the department, the bench held that “all the persons to whom commission was paid were either Directors of the Company or their relatives. None of them is shown to have any expertise in procuring IOF from the Indian markets for enabling the Appellant to meet the purchase order placed on it for IOF. The amounts paid as commission were also not insubstantial. In the facts of the case, it cannot be said that the AO’s decision to disallow part of the payment towards commission was unreasonably arrived at. The test of commercial expediency was indeed applied. Even from the point of view of a businessman, it does appear to this Court that the commission amount which was disallowed by the AO cannot be said to be for the purpose of business of the Appellant.”
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