Disallowance of Commission is Unjustified When Linked to Substantial Growth in Sales and Profits.

Issue

Can an Assessing Officer (AO) disallow commission expenses by deeming them “unverifiable” and not genuine, even when the assessee provides substantial evidence of payment, confirmations from recipients, and can demonstrate a direct correlation between the commission paid and significant business growth?

Facts

For the Assessment Year 2021-22, the assessee claimed a deduction for commission paid to four parties, on which Tax Deducted at Source (TDS) was duly deducted.
The AO disallowed the entire expense, claiming it was unverifiable, not incidental to the business, and not a genuine expenditure.
The assessee provided a multi-faceted defense, proving:
- Business Nexus: Sales had more than doubled, and profits had increased by 100% compared to the previous year, demonstrating the effectiveness of the commission agents.
- Genuineness: Detailed evidence of payment was furnished, and the recipients of the commission confirmed the transactions.

Decision

The court ruled decisively in favour of the assessee and deleted the disallowance.
It held that the assessee had successfully demonstrated both the business expediency and the genuineness of the commission payments.
The AO’s decision to disallow the expense was found to be unjustified in the face of the compelling evidence provided.

Key Takeaways

Business Growth Corroborates Expense: A significant increase in sales and profits is strong circumstantial evidence that supports the genuineness and business purpose of commission payments.
Complete Documentation is Key: The assessee discharged its onus by providing a complete documentary trail—proof of payment, TDS compliance, and, crucially, confirmations from the payees.
AO Cannot Ignore Evidence: An Assessing Officer cannot make a disallowance based on mere suspicion or a summary conclusion of “unverifiable” when the assessee has submitted substantial evidence to the contrary.

No Disallowance Under 40(a)(ia) When TDS Compliance is Proven with Form 26AS.

Issue

Can an Assessing Officer sustain a disallowance under Section 40(a)(ia) for the alleged non-deduction of TDS on job-work expenses when the assessee provides concrete documentary proof, such as the vendor’s Form 16A and Form 26AS, confirming that TDS was indeed deducted and deposited?

Facts

The assessee made payments for job-work expenses and claimed to have deducted TDS on them.
The Assessing Officer made an addition under Section 40(a)(ia), alleging that TDS had not been deducted.
To rebut this, the assessee produced direct evidence: the vendor’s Form 16A (TDS Certificate) and the corresponding entry in the vendor’s Form 26AS (Annual Tax Statement).
This evidence conclusively proved that the tax had been deducted and credited to the government, and there was no mismatch as alleged by the AO.

Decision

The court ruled in favour of the assessee and deleted the addition.
It held that the documentary evidence, particularly the Form 26AS of the vendor, was irrefutable proof of TDS compliance.
The AO’s allegation was found to be factually incorrect and contrary to the evidence on record.

Key Takeaways

Form 26AS is Conclusive Proof: A taxpayer can effectively defend against a disallowance under Section 40(a)(ia) by obtaining and producing the payee’s Form 26AS, which acts as a definitive record of the tax credited to the government.
Burden of Proof: The initial burden is on the assessee to prove TDS was deducted. Furnishing Form 16A and Form 26AS fully discharges this burden.
Factual Verification is Crucial: The case highlights the importance of the AO conducting a thorough factual verification. An addition made on an incorrect premise, which is easily verifiable from the system (Form 26AS), is legally unsustainable.

IN THE ITAT AHMEDABAD BENCH

Midas Metacast (P.) Ltd.

ITO

Sanjay Garg, Judicial Member
and Annapurna Gupta, Accountant Member

ITA No. 435 (Ahd) of 2025
[Assessment year 2021-22]

OCTOBER 7, 2025

Dhinal Shah, AR for the Appellant. Veerabadram Vislavath, Sr. DR for the Respondent.

ORDER

Sanjay Garg, Judicial Member.- The present appeal has been preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 02/12/2024 for Assessment Year (AY) 2021-22.

2. The assessee has taken following grounds of appeal:

“1. The Learned Commissioner of Income-tax (Appeals) [CIT(A)’] has erred in confirming disallowance of Commission expense of INR 25,41,797 on the ground that the same is not genuine in as much as the entire commission expense is incurred wholly and exclusively for the purpose of business and the same is genuine and all the details relating to payment of commission have been duly submitted which has not been appreciated by the Learned CIT(A).

2. The Learned CIT(A) has erred in confirming the disallowance of 8,60,923 under section 40(a)(ia) of the Act on the ground that the TDS is not deducted on Job work expenses of INR 28,64,747 (75,96,250 – 47,31,507) in as much as the company has duly deducted the TDS under applicable provisions on the amounts which are required to be deductible and therefore the disallowance is bad in law.

The Appellant craves leave to add, alter, amend or withdraw any of the above grounds at or before the hearing of the appeal.

All the grounds of appeal stated above are without prejudice to each other.”

3. Ground No.1: Vide Ground No.1, the assessee has agitated against the confirmation of addition of Rs. 25,41,797/- on account of disallowance of commission paid. The Assessing Officer (AO), during the assessment proceedings, noticed that the assessee during the year had paid commission to four parties amounting to Rs.37,49,260/- on which TDS amounting to Rs.1,40,597/- was deducted. On being asked to explain as to why the commission was paid and to establish the genuineness of the transaction, the assessee furnished the necessary details and submitted that the commission was paid to the aforesaid parties on the sales made through the aforesaid parties. To verify the commission paid, the AO called for the confirmations by issuing notices u/ s.133(6) of the Income Tax Act, 1961 (in short “the Act”) to the parties out of which one party, namely, M/ s.Varun Radiators Pvt.Ltd. did not reply. The AO taking into consideration the explanation furnished by the assessee observed that in this case the commission payments were verbally decided on total quantitative sales during the year and, hence, single bill was raised on commission. He observed that the brokers usually take their brokerage on every sales/transaction and that the payment of the commission for whole of the year on lump sum basis was not natural. He further observed that one party, namely, M/ s.Varun Radiators Pvt.Ltd. did not confirm the receipt of the commission. He further observed that even the said M/ s.Varun Radiators Pvt.Ltd. and another party M/ s.Basant Industries did not file their ITRs for the relevant assessment year. He also observed that the practice of payment of commission by the assessee was not there in earlier assessment years. That the sales commission was introduced by the assessee for the first time. He further observed that even the commission income was not reflected in the ITRs of the Commission Agents. He also observed that even the confirmations, ledger extracts, bank entries or copy of ITR as supporting documents of the commission agents have not been provided by the assessee or commission agents. The AO, therefore, disallowed the commission expenses of Rs.25,41,797/- observing that the commission expenses claimed to that extent remained unverifiable and further that the assessee had failed to prove that the same were incidental to the business and genuine expenditure.

3.1. The Ld.CIT(A) confirmed the addition so made by the AO.

4. We have heard the rival contentions of the Ld.Representatives of the parties and gone through the record. The Ld. Counsel for the assessee has submitted that the assessee had made genuine commission payments, whereupon, the TDS was deducted. That the commission payment was made through banking channel. He has further submitted that the aforesaid commission payment has resulted into increase of business/ sales turnover of the assessee. He has submitted that the sales turnover of the assessee for the preceding assessment year was at Rs. 30.09crores, which during the year has increased to Rs. 71.91crores. Further, that the last year profits of the assessee were at Rs.18.95crores, which during the year had increased to Rs.45.47crores. He, further bringing our attention to page No.4 of the assessment order, has submitted that the observation of the AO that M/ s.Varun Radiators Pvt.Ltd. had not responded to the notice issued u/ s.133(6) of the Act was factually incorrect. That the said M/ s.Varun Radiators Pvt.Ltd. had duly replied and confirmed the receipt of the commission from the assessee, which fact has been found mentioned in Para-4 of the Assessment Order. The Ld.Counsel has further submitted that it was duly explained to the lower authorities that as per the commission terms, the commission was paid on yearly sales made through the Commission Agent and that merely because the commission was not paid on each of the transaction, but on total sales made throughout the year cannot be a ground to disbelieve the commission payment. He has further submitted that the assessee has duly provided the bank statement highlighting the payments made to the commission agents. He has submitted that all the necessary supporting documents including bank statements of payment, invoices of the commission, ledger of all parties to whom the commission has been paid was duly provided. That the observation of the AO that the assessee has not provided the supporting documents was factually incorrect. He has further submitted that even M/s.Varun Radiators Pvt.Ltd. had filed its return of income later on, the copy of which was also supplied during the appellate proceedings. The Ld.DR could not rebut the aforesaid evidences furnished by the assessee. In view of this, we do not find justification on the part of the AO in making the disallowance of commission payment especially when the assessee has duly demonstrated that the sale of the assessee has increased to more than double as compared to the last year sales and even the profits of the assessee have also increased @100% as compared to the last year. Further, the assessee has duly furnished the details and evidences to prove the payment of commission which has also been confirmed by the recipients. In view of the above discussion, the impugned addition made by the AO is not sustainable and the same is hereby ordered to be deleted.

5. Ground No.2: Vide Ground No2, the assessee has agitated against the confirmation of disallowance of Rs.8,60,923/- u/s.40(1)(ia) of the Act on account of non-deduction of TDS on job-work expenses of Rs.28,64,747/ – out of the total expenses paid of Rs.75,96,250/ – during the year.

5.1. The Ld. Counsel for the assessee, in this respect, has demonstrated that the aforesaid observation of the AO that the assessee has not deducted TDS on the payment of Rs.28,64,747/- was factually incorrect. In fact, the AO failed to take note of the quarterly TDS returns filed by the assessee. That the Ld. AO has failed to take into consideration the job-work expenses related to the months of October to December-2020 and TDS deducted thereupon, therefore, erroneously made disallowance of Rs.8,60,923/- @10% of the jobwork expenses paid during the said period of Rs.28,64,743/-. The Ld.Counsel has submitted that the Form 26AS of the party to whom the job-work expenses were paid, showed a total credit of Rs.76,25,108/- and TDS of Rs.1,14,519/- was deducted on the same which included the job-work expenses of Rs.75,96,250/-. The assessee also furnished the Form 16A and Form 26AS of the vendor showing of total amount on which TDS deduction was made during the year. The Ld.Counsel, therefore, has submitted that there was no mismatch regarding the deduction of TDS as alleged by the AO. The Ld.DR could not rebut the aforesaid factual aspect. In view of this, the impugned addition on account of non deduction of TDS is not sustainable and the same is hereby ordered to be deleted.

6. In the result, the appeal of the assessee stands allowed.