The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) deleted a Tax Deducted at Source (TDS) related disallowance of Rs. 2.92 lakh made under section 40(a)(ia) of Income Tax Act,1961 in respect of referral commission payments of Rs. 13.90 lakh made to five individuals without deducting tax.

Bhavesh Karamshi Thakkar,appellant-assessee, had paid Rs.13,90,961/- to five individuals without deducting tax at source. The Assessing Officer (AO) treated these payments as insurance commission and applied section 194D of the Act.

As the assessee did not deduct tax, the AO disallowed Rs.2,92,102/- u/s. 40(a)(ia), applying a 30% ad hoc disallowance. The assessee challenged the disallowance before the first appellate authority but the appeal was dismissed.

The assessee counsel argued that section 194D of the Act did not apply, as it was meant for insurance commission paid by insurance companies to registered agents. He pointed out that under section 42 of the Insurance Act, 1938, only persons meeting certain qualifications and training could be appointed as Insurance Agents.

Since the individuals who received referral commission were not registered agents, section 194D was not applicable. He added that if the payment fell under section 194H, it was still not applicable because the assessee was an individual and total receipts were below Rs.1 crore.

Therefore, he submitted, there was no obligation to deduct tax, making the disallowance u/s. 40(a)(ia) unsustainable. He relied on PCIT vs. Tata AIG General Insurance Co. Ltd. [2019] 111 Taxmann.com 92 (Bom).

The Departmental Representative argued that section 194D applied to “any person,” not just insurance companies, and since the payment was commission, the provision was attracted.

The two member bench comprising Saktijit Dey (Vice President) and N.K Billaiya (Accountant Member) examined the submissions and materials on record, focusing on whether the payments made by the assessee to certain individuals as referral commission constituted insurance commission under section 194D of the Act.

The AO’s proceedings revealed that these individuals only provided leads to potential clients, while the assessee personally contacted and dealt with the clients. They had no knowledge of insurance policies and played no role in soliciting, procuring, renewing, or reviving policies.

Under section 42 of the Insurance Act, 1938, only qualified and trained persons appointed by insurers as Insurance Agents could solicit or procure insurance business. The tribunal noted that the individuals receiving referral commission were not appointed as Insurance Agents and had no principal-agent relationship with the insurers. The assessee, being a licensed Insurance Agent, had engaged them solely to benefit his own business.

The appellate tribunal concluded that the payments did not fall under section 194D. Even if covered under sections 194H or 194C, the provisions were inapplicable as the assessee was an individual and receipts were below the threshold. Therefore, the disallowance under section 40(a)(ia) was unsustainable, and the AO was directed to delete it.

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