Sales Commission to Director’s Relatives allowable when Services Proven: ITAT Deletes ₹35.38 Lakh Disallowance [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Bangalore Bench, has deleted a disallowance of ₹35.38 lakh made by the Assessing Officer (AO) towards sales commission paid to the relatives of the directors, holding that the payments were genuine, the services rendered were proved, and the tax authorities had relied on assumptions rather than evidence.

For the Assessment Years 2014-15 and 2015-16, the assessee - CPV Engineer Pvt. Ltd had claimed commission expenditure paid to six individuals, all of whom were connected to the directors. The AO rejected the claim on the grounds that turnover had decreased despite the commission payments and that no specific sales attributable to each individual had been demonstrated.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, further observing, particularly regarding three female recipients that it was “not easy to conceive” that they were involved in selling industrial pumps.

Before the Tribunal, the assessee argued that the recipients were all qualified, experienced, and engaged in various aspects of the company’s operations, including customer handling, technical support, and development of business relationships.

The Tribunal noted that the recipients included an M.Tech postgraduate, BE and MBA professionals, an MSc & MBA holder, and experienced engineers and graduates who had been associated with the company for several years.

The assessee also submitted that commission payments need not be linked to specific invoices and that incentives can also be paid for broader functions such as customer service, complaint resolution, and retention of clients. The assessee also pointed out that in the subsequent year, the same AO had allowed 90% of similar commission expenses, indicating acceptance of the business practice in principle.

The Revenue, however, asserted that payments to relatives were suspicious, especially given the declining turnover and lack of detailed documentation.

However, the bench of Keshav Dubey ( Judicial member) and Prashant Maharishi ( Vice President ) found that such apprehensions were misplaced. The Tribunal observed that all recipients had disclosed the commission income in their tax returns and that tax had been deducted at source.

In addition, the Tribunal held that neither the AO nor the CIT(A) had examined the educational qualifications, technical backgrounds, or roles played by the individuals. Instead, the authorities had relied on conjectures, particularly the assumption that women could not contribute to selling industrial pumps, an approach the Tribunal described as unreasonable and unsupported by the facts.

The Tribunal observed that “merely because the recipients are relatives” does not invalidate the expenditure if the services are real, and the payments are made wholly and exclusively for business purposes, which the assessee had shown in detail.

Accordingly, the ITAT directed the deletion of the entire ₹35.38 lakh disallowance, holding that the expenditure was genuine and commercially justified. The Tribunal also granted relief on the disallowance of interest expenditure, ₹1.80 lakh for AY 2014-15 and ₹3.24 lakh for AY 2015-16, after finding that the company had sufficient interest-free funds to advance loans to its director.

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