Unsubstantiated Foreign Commission Disallowance is Upheld but Reduced to Prevent Double Taxation of Written-Back Amounts

By | May 13, 2026
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Unsubstantiated Foreign Commission Disallowance is Upheld but Reduced to Prevent Double Taxation of Written-Back Amounts

Issue

Whether the disallowance of foreign agency commission is justified when the identity of the recipient and services rendered remain unproven, and how to treat such disallowances if the liability is subsequently written back and offered to tax in a later year.

Facts

  • The Claim: The assessee claimed deductions for foreign agency commission payable to SC LLC, USA, for assessment years 2007-08 to 2010-11.

  • International Inquiry: The CBDT initiated inquiries with US tax authorities under Article 28 of the DTAA. The US authorities reported that the foreign entity (SC LLC) rendered no services to the assessee and had no income receivable from them.

  • Lack of Evidence: The assessee failed to furnish supporting invoices or demonstrate the nexus between the payment and the business.

  • Identity Contradiction: Discrepancies were found regarding the identity of the recipient; the party to whom commission was allegedly payable differed from the party to whom payments were actually made.

  • Subsequent Action: In AY 2013-14, the assessee wrote back these liabilities and offered the aggregate amount to tax under Section 41(1) (amount no longer payable), which the Revenue accepted.

Decision

  • On Merits: The disallowance of the commission expenditure is upheld. The assessee failed to establish the three pillars of a business deduction under Section 37(1): the identity of the recipient, the nature of services rendered, and the business nexus.

  • On Double Taxation: Since the same amounts were offered to tax by the assessee in AY 2013-14 as a “write-back,” maintaining the full disallowance in the earlier years would lead to double taxation.

  • Relief: The additions made for the relevant assessment years are to be reduced by the specific amounts that the assessee can demonstrate were already offered to tax in AY 2013-14. This relief is granted strictly to eliminate double taxation without validating the original merits of the commission claim.

Key Takeaways

  • Substance Over Form: Deductions under Section 37(1) require concrete proof of services rendered. Confirmations from foreign tax authorities via DTAA protocols carry significant weight in debunking sham commission claims.

  • The Identity Test: Discrepancies between the “accrued” party and the “paid” party without a substantiated legal relationship are fatal to an expenditure claim.

  • Prevention of Double Taxation: While a disallowance may be legally sound on merits, if the assessee voluntarily offers the same amount to tax in a subsequent year (via write-back), the courts will intervene to ensure the Revenue does not collect tax on the same quantum twice.

  • DTAA Article 28 (Exchange of Information): This case highlights the effectiveness of international cooperation in verifying the legitimacy of cross-border payments.

IN THE ITAT MUMBAI BENCH ‘D’
Ritu Sanjay Toshniwal
v.
ACIT
Pawan Singh, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member
IT Appeal Nos. 196 to 199 (Mum) of 2026
[Assessment years 2007-08 to 2010-11]
MAY  6, 2026
Satyaprakash Singh, CA for the Appellant. Annavaram Kosuri, Sr. AR for the Respondent.
ORDER
Makarand Vasant Mahadeokar, Accountant Member.- These four appeals filed by the assessee are directed against separate orders passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] all dated 19.11.2025 for A.Ys. 2007-08 to 2010-11. The impugned appellate orders arise from the respective assessment orders passed by the Assessing Officer under section 143(3) r.w.s. 254 of the Income Tax Act, 1961[hereinafter referred to as “the Act”] pursuant to directions of the Tribunal in earlier round of litigation.Since common issues are involved in all the appeals, the same were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. Common facts are such that the assessee is an individual engaged in the business of export and trading of paper products through proprietary concern M/s Marisa International. For the relevant assessment years, the assessee had claimed deduction on account of foreign agency commission payable to M/s Shore Chem LLC, USA. The original assessments in earlier years were completed under section 143(3) accepting the returned income. Subsequently, based on information received during assessment proceedings for A.Y. 2010-11, the Assessing Officer initiated enquiries through CBDT with the US tax authorities under Article 28 of the DTAA between India and USA.
3. The information received from US authorities indicated that M/s Shore Chem LLC had neither rendered any services to the assessee nor had any income receivable from the assessee. Based on such information, the Assessing Officer formed a belief that the assessee had inflated its expenditure by way of commission payable and accordingly initiated reassessment proceedings under section 147 for earlier years and also made disallowances in A.Y. 2010-11.
4. In the reassessment orders passed under section 143(3) r.w.s. 147, the Assessing Officer disallowed the foreign commission expenditure on the ground that the assessee failed to establish the genuineness of services rendered by the foreign party, failed to furnish supporting invoices, and there existed contradictions regarding the identity of the recipient of commission. The matter travelled to the Tribunal, wherein the Coordinate Bench restored the issue to the file of the Assessing Officer with a direction to examine the additional evidences furnished by the assessee.Pursuant to the directions of the Tribunal, the Assessing Officer passed fresh orders under section 143(3) r.w.s. 254 for all the years, once again disallowing the commission expenditure on the ground that no new evidence substantiating the genuineness of the transaction was furnished and that the additional evidences were either not credible or were already available during earlier proceedings.
5. During the course of assessment proceedings, the assessee submitted that the commission was paid for business purposes and furnished documents such as agreement with M/s Shore Chem LLC, ledger accounts, bank advices for remittances, email correspondence and affidavit. It was further submitted that the commission pertaining to multiple years aggregating to Rs. 4,94,36,992/- was subsequently written back in A.Y. 2013-14 and offered to tax, and therefore disallowance in earlier years would result in double taxation.
6. The Assessing Officer, however, was not satisfied with the submissions and held that the assessee failed to prove the rendering of services, genuineness of liability and identity of the recipient. Reliance was placed on information received from US authorities denying any such transaction. Accordingly, the commission expenditure was treated as non-genuine and disallowed.
7. Aggrieved, the assessee preferred appeals before the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the Assessing Officer and also challenged the validity of reopening in earlier years. It was contended that the assessee had furnished all relevant evidences and that the disallowance was not justified. The alternative plea of double taxation was also raised. The CIT(A), after considering the submissions, upheld the disallowance made by the Assessing Officer. It was observed that the disallowance was justified primarily on account of failure of the assessee to establish genuineness of services and also in view of categorical denial by M/s Shore Chem LLC of rendering any services to the assessee. The CIT(A) thus confirmed the additions made by the Assessing Officer for all the years.
8. Year-wise details of the assessments are tabulated below for the ready reference :
Particulars A.Y. 200708 A.Y. 200809 A.Y. 2009 10 A.Y. 201011
Return filed 30.07.2007 29.09.2008 29.09.2009 25.09.2010
Original Assessment 143(3) dated 06.11.2009 143(3) dated 22.12.2010 143(3) dated 25.11.2011 143(3) dated 22.03.2013
Assessed Income u/s 143(3) And read with section 147 Rs. 27,42,260/-Rs. 1,45,76,150/ – Rs. 77,49,320/-Rs. 2,52,47,097/ – Rs. 81,52,650/-Rs. 1,84,62,953/ – Rs. 1,65,39,590/ –
Reassessmen t 143(3) r.w.s. 147 dated 31.03.2015 31.03.2015 27.02.2014 Not applicable
ITAT First Order 22.11.2017 22.11.2017 12.05.2017 12.05.2017
Set-aside Assessment 143(3) r.w.s. 254 dated 28.12.2018 28.12.2018 28.12.2018 31.12.2018
CIT(A) Order 19.11.2025 19.11.2025 19.11.2025 19.11.2025
Commission Disallowed Rs. 1,18,33,890/ – Rs. 1,74,97,787/ – Rs. 97,31,907/- Rs. 69,59,993/-
Assessed Income same as per the order u/s 143(3) r.w.s.254 Rs. 1,45,76,150/ – Rs. 2,52,47,097/ – Rs. 1,84,62,953/ – Rs. 1,65,39,590/ –

 

9. Aggrieved by the aforesaid orders of the learned CIT(A), the assessee is in further appeal before us for all the years under consideration. The grounds raised by the assessee are identical in substance across the years, except for variation in the quantum of disallowance. The grounds for A.Y. 2007-08 read as under:
Ground No.1:
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance and adding back to total income, the commission payable to M/s. Shore Chem. LLC (USA) amounting to Rs.1,18,33,890 debited to P&L A/c, ignoring the appellant’s compliance with evidentiary requirements and business necessity.
Ground No.2:
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining disallowance u/s 250 of the Act amounting to Rs. 69,59,993/- in respect of commission expense. Without prejudice to Ground No. 1, the commission so debited to P&L A/c in respect of Assessment Years 2006-07 to 2010-11 totalling to Rs.4,94,36,992/-was written back and credited to P&L A/c. for the year ending 31.03.2013 and the same has duly suffered tax in the A.Y.2013-14. Disallowing the said expense would only lead to double taxation of income. The appellant prays that the disallowance may please be deleted.
The appellant craves the liberty to add, alter, amend or delete all or any of the grounds of appeal before or during the course of hearing.
10. During the course of hearing, the learned Authorised Representative (AR) of the assessee drew our attention to the details of commission payable as placed at page 16 of the paper book and submitted that the assessee had discharged the liability towards commission to the extent the same was payable in accordance with the underlying understanding with the foreign party. It was further submitted that the balance amount, which remained no longer payable, was duly written back by the assessee in A.Y. 2013-14 and offered to tax in the return of income for the said year.
11. The learned AR further invited our attention to the assessment order passed for A.Y. 2013-14 under section 143(3) r.w.s. 254 dated 20.12.2019, wherein the Assessing Officer has examined the said write back of commission amounting to Rs. 4,94,48,280/- credited in the Profit & Loss Account under the head “amount no more payable write back”. It was submitted that the Assessing Officer, after considering the explanation of the assessee, has accepted the returned income and no adverse inference has been drawn in respect of such write back.
12. The learned AR also referred to the Profit & Loss Account for A.Y. 2013-14, wherein the aforesaid amount of Rs. 4,94,48,280/-has been credited, and submitted that once the corresponding liability has been taxed in the subsequent year, the disallowance of the same expenditure in the earlier years would result in double taxation of the same amount, which is impermissible in law.
13. It was thus contended that disallowance of the commission expenditure in the impugned assessment years would result in taxation of the same amount twice, inasmuch as the liability, to the extent not payable, has already been written back and offered to tax in A.Y. 2013-14. It was submitted that once the said amount has been subjected to tax in the subsequent year, sustaining the disallowance in the earlier years would lead to double taxation of the same income, which is impermissible in law. Accordingly, it was prayed that the additions confirmed by the learned CIT(A) be deleted.
14. On the other hand, the learned Departmental Representative strongly relied upon the orders of the Assessing Officer and the learned CIT(A) and invited our attention to the relevant findings recorded therein. Referring to the paras, it was submitted that the assessee had claimed substantial commission expenditure over multiple years aggregating to Rs. 4,94,36,992/-, however, as evident from the tabulated details, no actual payments were made for a considerable period and the amounts continued to remain outstanding.The learned DR further submitted that even the so-called payments reflected in A.Y. 2010-11 were not actual outflows but mere journal entries adjusting the liability, which, according to the Assessing Officer, was not permissible in law.
15. We have carefully considered the rival submissions, perused the material placed on record, and examined the orders of the authorities below as well as the earlier order of the Coordinate Bench in the assessee’s own case in Ritu Sanjay Toshniwal v. Jt. CIT [IT Appeal Nos. 7213 and 7725 (Mum) of 2014 , dated 12-5-2017].
16. At the outset, it is evident that the issue relating to allowability of foreign agency commission claimed to have been paid/payable to M/s Shore Chem LLC has been subject matter of repeated examination across assessment years. In the earlier round, the Coordinate Bench, while dealing with A.Ys. 2009-10 and 2010-11, had restored the matter to the file of the Assessing Officer with a categorical observation that the burden squarely lies upon the assessee to substantiate the genuineness of the commission expenditure with proper and credible documentary evidence. Thus, the Tribunal had consciously refrained from adjudicating the issue on merits and instead mandated a comprehensive factual verification.
17. In the set-aside proceedings, the Assessing Officer has reiterated the disallowance after detailed examination of the material on record and, significantly, after taking into account findings emerging from earlier assessment proceedings. It has been consistently noted that: (i) the agreement relied upon by the assessee was not found to be genuine and was not acknowledged by the alleged counterparty, (ii) the recipient entity, M/s Shore Chem LLC, categorically denied having rendered any services or having received any commission, as confirmed through information obtained under the Exchange of Information mechanism, (iii) no supporting bills, vouchers or contemporaneous correspondence evidencing services rendered were furnished, and (iv) the confirmations relied upon by the assessee were in the nature of unverified email communications lacking evidentiary value.
18. Further, from the analysis of past records, it emerges that substantial commission liabilities were continuously claimed over multiple years without actual discharge, and in certain instances were merely adjusted through book entries. The Assessing Officer has thus drawn a consistent inference across years that no real liability existed and that the claim was not supported by any demonstrable business exigency. It has also been specifically held that the plea of subsequent write back under section 41(1) is not tenable where the very liability is found to be non-genuine from inception.
19. On an overall consideration of the factual matrix emerging from the assessment orders for the relevant as well as preceding years, we find that the conclusions drawn by the Assessing Officer are neither isolated nor based on conjectures, but are founded on cumulative adverse material and consistent findings across years. These include, inter alia, information received from third-party sources under the Exchange of Information mechanism, absence of primary evidences such as agreements, invoices and contemporaneous correspondence, and material inconsistencies in the assessee’s claim.
20. It is further noticed that there is no clarity on the actual payments allegedly made, inasmuch as it has not been demonstrated whether such payments pertain to the outstanding commission liability claimed in earlier years or represent fresh and independent claims. There is also a fundamental inconsistency in the identity of the parties, as the entity to whom commission is stated to be payable is not the same as the party to whom payments are claimed to have been made. The relationship between such parties has also not been substantiated. Further, in the case of alleged foreign payments, there is no material on record to evidence compliance with statutory requirements, including deduction of tax at source under section 195, furnishing of Forms 15CA and 15CB, or any other regulatory compliances governing remittance of funds outside India.
21. In the absence of these critical evidences and statutory compliances, coupled with the fact that even the basic elements of the transaction such as identity of the recipient, nature of services rendered and nexus with business have not been established, the claim of commission expenditure remains unsubstantiated. The assessee has thus failed to place any cogent or credible material before us to rebut the findings of the Assessing Officer or to demonstrate that the expenditure was incurred wholly and exclusively for the purposes of business so as to be allowable under section 37(1) of the Act.
22. In view of the foregoing discussion and having regard to the cumulative factual findings emerging from the assessment orders for the relevant as well as preceding years, we find no infirmity in the conclusion drawn by the Assessing Officer and affirmed by the learned CIT(A) that the assessee has failed to discharge the onus cast upon it under section 37(1) of the Act. The claim of commission expenditure is vitiated by absence of credible evidence of services rendered, inconsistencies in the identity of parties, lack of clarity regarding actual payments vis-a-vis outstanding liabilities, non-compliance with statutory requirements governing foreign remittances, and adverse information received from the competent authority under the Exchange of Information mechanism. Accordingly, the disallowance of such expenditure is upheld on merits.
23. However, the controversy does not rest at this stage. The assessee has raised an alternative contention, duly supported by documentary material placed on record, that the aggregate amount of Rs. 4,94,36,992/-, representing commission claimed over the earlier years, has been written back in A.Y. 2013-14 and offered to tax under the head “amount no more payable write back”. It is an admitted position that the assessment for A.Y. 2013-14 has been completed under section 143(3) r.w.s. 254 dated 20.12.2019 and the said write back has been examined and accepted by the Assessing Officer.
24. In our considered view, once the very same amount has been subjected to tax in a subsequent year in the hands of the same assessee, sustaining the disallowance of the corresponding expenditure in the earlier years, without granting appropriate relief, would inevitably result in taxation of the same income twice. It is a settled principle that, in absence of any specific statutory mandate, the same income cannot be brought to tax more than once in the hands of the same assessee.
25. At the same time, it is equally necessary to preserve the findings recorded on merits regarding non-genuineness of the expenditure, particularly in view of the consistent and corroborated findings emerging from past assessment orders. It is also pertinent to observe that the timing difference between the year of disallowance and the year of taxation of the write back, or the concept of time value of money, cannot, in absence of any enabling provision under the Act, be a determinative factor either for sustaining or for negating the addition.
26. Balancing these aspects, namely, (i) the established nongenuineness of the claim, (ii) the admitted position that the corresponding amount has already been subjected to tax in A.Y. 2013-14, and (iii) the statutory scheme which does not envisage neutralization based on time value of money, we are of the considered view that relief is warranted strictly to the extent necessary to eliminate double taxation, without in any manner diluting the findings recorded on merits.
27. Accordingly, having regard to the assessment order for A.Y. 2013-14 and the detailed statement of reversal placed on record, we hold that the amounts which have been duly written back and offered to tax in A.Y. 2013-14 cannot again be subjected to tax by way of disallowance in the impugned assessment years. Thus, while affirming the disallowance of commission expenditure on merits, we direct that the additions made in the respective years shall stand reduced to the extent of the amounts which are demonstrated to have been offered to tax in A.Y. 2013-14, so as to obviate double taxation of the same income.
28. In the result, the appeals of the assessee are partly allowed in the above terms.