ITAT Remands Commission Disallowance; Section 68 Not Invocable Without Verification

For the 2011–12 assessment year, a commission agent reported an income of Rs. 1.77 crore. However, the tax office wasn’t satisfied and added over Rs. 1 crore back to his taxable income. The biggest chunk of this, about Rs 95.81 lakh, was for commission expenses that the officer simply didn’t believe were real. Why? Because when the department sent out letters to the people who received the commission, they didn’t reply.

The taxpayer argued that these weren’t “ghost” payments. They were documented in audited books, paid through bank transfers, and most importantly, tax (TDS) had already been deducted on them under Section 194H. Despite this, both the initial officer and the first appeals court stuck to the disallowance, essentially punishing the taxpayer because third parties failed to check their mail.

Issue Before Court: Can the tax department throw out a legitimate business expense just because a third party doesn’t respond to a notice, especially when there’s a clear bank trail and audited records?

HC Decided: The Tribunal decided to hit the reset button. While it didn’t fully delete the addition, it ruled that the taxpayer hadn’t been given a fair shot to prove his case. The Judges noted a major contradiction: the tax office never officially “rejected” the audited books, yet they ignored the evidence within them. Since the payments were made through proper banking channels with TDS, they couldn’t just be dismissed based on silence alone. The matter was sent back to the Assessing Officer for a fresh, more thorough look.

The Tribunal also addressed the “ad hoc” disallowance of 20% on administrative and travel costs. It ruled that while some personal use of these expenses might exist, a 20% cut was “excessive” and arbitrary. It ordered the department to cut that disallowance in half, down to 10%, giving the taxpayer a significant break on his administrative tax bill.

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