The Income Tax Appellate Tribunal (ITAT), Kolkata, has clarified that disallowance of brokerage and commission under Section 37(1) of the Income Tax Act cannot be sustained merely on suspicion or the ground that payments were made to related parties. The tribunal held that compliance with TDS provisions and maintenance of books of accounts in the ordinary course of business are sufficient to establish the genuineness of such expenses, overturning a disallowance of ₹65,19,492 by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals).
Background & Facts
The Dispute
The appellant, A.B. Nirvan Builders (P) Ltd., is engaged in the business of construction and sale of residential flats in Kolkata. For the Assessment Year (AY) 2012-13, the assessee filed its return of income on 29.09.2012, declaring a total income of ₹3,30,71,72. The case was selected for scrutiny under Section 143(2) of the Income Tax Act, and notices under Section 142(1) were issued and duly served.
Key Facts
- The assessee’s total sales proceeds from flats during the year amounted to ₹73,19,79,862, with additional income from interest, dividend, and miscellaneous sources aggregating ₹3,04,770.
- The assessee debited brokerage and commission expenses of ₹65,19,492, paid to various parties for facilitating the sale of flats and fetching customers.
- The assessee claimed that it is customary in the real estate business to engage commission agents who bring customers in lieu of commission.
- Tax Deducted at Source (TDS) was deducted and deposited into the government treasury.
- The AO disallowed the commission expenses, treating them as bogus, on the ground that there was no evidence to corroborate the services rendered by the commission agents.
Procedural History
- 29.09.2012: Return of income filed by the assessee.
- 29.03.2013: Notice under Section 143(2) issued for scrutiny.
- 27.03.2015: Assessment order passed under Section 143(3), disallowing ₹65,19,492 under Section 37(1).
- 20.01.2025: Order of the National Faceless Appeal Centre (Ld. CIT(A)) upheld the AO’s disallowance.
- 11.06.2026: Hearing before ITAT Kolkata.
- 29.06.2026: ITAT pronounces order allowing the assessee’s appeal.
The Parties' Positions
For the Assessee
- Argued that payment of commission to brokers is customary in the real estate business.
- Submitted that TDS was duly deducted and deposited, and details of commission agents (names, addresses, PAN numbers, and amounts paid) were furnished to the AO.
- Contended that the AO and CIT(A) erred in disallowing the expense without pinpointing any defect in the genuineness of the transactions.
For the Revenue
- Contended that the assessee failed to provide evidence of services rendered by the commission agents.
- Noted that most of the commission agents were family members with the same address and that commission was paid at a flat rate of 2.5%, raising suspicions of bogus transactions.
Relief Sought
The assessee sought deletion of the disallowance of ₹65,19,492 under Section 37(1) and restoration of the expense as a legitimate business expenditure.
The Legal Issue
The central question before the ITAT was whether the disallowance of brokerage and commission expenses under Section 37(1) of the Income Tax Act could be sustained merely on the grounds of suspicion, absence of direct evidence of services rendered, or the fact that payments were made to related parties.
Arguments Presented
For the Appellant
- Relied on the decision of the Hon’ble Calcutta High Court in CIT vs. M/s Inbuilt Merchant Pvt. Ltd. (ITAT No. 225 of 2013, GA No. 3825 of 2013, dated 14.03.2014), which held that books of accounts maintained in the ordinary course of business are relevant and cannot be discarded without appropriate reasons.
- Argued that the assessee had complied with TDS provisions, and the tax deducted was deposited into the government treasury.
- Submitted that the AO and CIT(A) failed to establish any defect in the genuineness of the transactions.
For the Respondent
- Contended that the assessee failed to provide evidence of services rendered by the commission agents.
- Highlighted that most of the commission agents were family members with identical addresses, and commission was paid at a fixed rate, raising doubts about the genuineness of the transactions.
The Court's Analysis
The ITAT examined the facts and legal principles governing the disallowance of expenses under Section 37(1). The tribunal noted the following:
-
Customary Practice in Real Estate: The assessee’s business of selling flats through brokers and commission agents is a well-established practice in the real estate industry.
-
Evidence Furnished: The assessee provided detailed evidence, including PAN numbers, names, addresses, rates of commission, amounts paid, and proof of TDS deduction and deposit. The tribunal observed that the AO and CIT(A) failed to pinpoint any specific defect in the genuineness of the transactions.
-
TDS Compliance: The tribunal emphasized that the assessee had deducted TDS and deposited it into the government treasury, which is a strong indicator of the genuineness of the transactions.
-
Precedent Application: The ITAT relied on the decision of the Hon’ble Calcutta High Court in CIT vs. M/s Inbuilt Merchant Pvt. Ltd., which held:
"The views expressed by the Assessing Officer are erroneous in law. The Assessing Officer has overlooked the importance of the books of accounts maintained in the ordinary course of business. Reference in this regard may be made to sub-section (2) of Section 32 of the Indian Evidence Act, 1872. The books of accounts maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. The mere fact that recipient did not reply in some cases or they were not found at the address furnished by the assessee does not in the least prove the fact that they were non-existent or that the payments shown to have been made by the assessee were imaginary. With the advancement of technology, it has become possible to sell goods throughout the country through the internet. For that purpose, agents are required throughout the country. The mechanism in that regard has been disclosed by the assessee and has been recorded in the order of the CIT (Appeals). For the purpose of carrying on its business, the assessee has to recruit the agents. It may not be possible for the assessee to know them personally. Whatever address was furnished to the assessee, has been disclosed to the Income-tax Department. Payments were admittedly made by cheque after deduction of tax. The tax deducted as source has duly been deposited."
The tribunal further noted that the judgment in CIT vs. Precision Finance Pvt. Ltd. (208 ITR 465) relied upon by the revenue was distinguishable, as it pertained to a scenario where mere payment by account payee cheque was insufficient to establish genuineness. In the present case, however, additional evidence such as books of accounts, TDS deduction, and deposit of TDS were available.
The Verdict
The ITAT allowed the assessee’s appeal, setting aside the order of the Ld. CIT(A) and directing the AO to delete the disallowance of ₹65,19,492. The tribunal held that the disallowance under Section 37(1) could not be sustained in the absence of proof that the commission payments were bogus or unreasonable.
What This Means For Similar Cases
Burden of Proof Lies on the Revenue
- The ITAT’s decision reinforces that the burden of proving the non-genuineness of expenses lies on the revenue. Mere suspicion or the fact that payments were made to related parties is insufficient to disallow expenses under Section 37(1).
- Practitioners must emphasize compliance with TDS provisions and the maintenance of books of accounts as strong evidence of genuineness.
TDS Compliance and Books of Accounts Are Critical
- TDS Deduction and Deposit: Compliance with TDS provisions is a significant factor in establishing the genuineness of transactions. Assessees should ensure that TDS is deducted and deposited timely.
- Books of Accounts: Maintenance of books of accounts in the ordinary course of business is relevant evidence under Section 32 of the Indian Evidence Act, 1872, and cannot be discarded without valid reasons.
Related Party Transactions Require Scrutiny but Not Automatic Disallowance
- Payments to related parties or family members do not automatically render the transactions bogus. The revenue must establish specific defects or unreasonableness in such transactions.
- Assessees should maintain detailed records of transactions with related parties, including agreements, invoices, and proof of services rendered, to counter disallowance claims.
Precedent Reliance Strengthens Assessee’s Case
- The decision in CIT vs. M/s Inbuilt Merchant Pvt. Ltd. serves as a strong precedent for assessees engaged in businesses where commission payments are customary. Practitioners should cite this judgment to argue against disallowances based on mere suspicion.
