D.C.I.T. V/s. Shri Surendra Mohan Mukhija

1.    Summary

It is important to note that to make the provisions of section 194H applicable, three requisites need to be complied with. These requisites are the essence of section 194H namely; service is rendered by the person receiving commission, the payments should have been given in lieu of such services rendered and there should be a principal/agent relationship the two parties. The assessee gave discounts to the purchasers of flats on account of pre-launch booking to attract the potential customers in the market. Such discounts cannot be treated as distribution of commission income. Hence on this basis the entire disallowance of expenses on account of discounts given to purchasers cannot be done under section 40(a)(ia) and the provisions of these sections cannot be made applicable.

2.    Facts of the case:

2.1 The assessee being director of M/S Surendra Buildtech Pvt. Ltd was served notice under section 143(2) on 29.09.2009.

2.2 The assessee declared his income to the tune of Rs. 1, 11, 16, 550. In assessment proceedings it came to notice of Assessing officer that assessee received total commission of Rs. 3,13, 23, 388 and claimed an expense under the head ‘marketing expenses’ which included ‘Incentive & discount’ to the tune of Rs. 51, 37, 584.

2.3 The assessee gave incentives to purchasers who booked under pre-launch booking. The payment for discount was made through account payee cheques only and they received commission only when the person concerned paid the full amount to the builder. The assessee also enclosed details and photocopies of confirmation.

2.4 It was held that marketing expenses was actually passed on to various persons who booked/purchased the property referred above. Subsequently Assessing officer disallowed such marketing expenses.

3.    Contention of department :

The department contended that any amount is subject to TDS provisions of section 194 H i.e TDS on payment of commission; only  in following cases:

i) services are rendered by the recipient.

ii) That the payments should have been given in lieu of such services.

iii) There should be a principal/agent relationship.

The department contended that no services are rendered by purchasers of flats to the assessee in this case, infact it was seen that assessee gave discount to purchasers of flat with a view to have competitive edge in the market. Department also held that since there were no services which were received assessee hence question of commission do not arises in any case. Also there was no principal/agent relationship between purchasers of flats and assessee. The department claimed that Assessing Officer failed to cite any instance in assessment order that the discount has been given to persons other than those who had made the original booking.

Hence discount offered by him cannot be treated as commission and decided in favour of assessee saying that the provisions of section 40(a)(ia) of Income-tax Act were not  applicable and hence the marketing expense of  Rs. 51, 37, 584 were allowed as expenses.

4.    Contention of Assessee:

4.1 The assessee was of contention that the expenditure under the head marketing expenses was incurred wholly and exclusively for the purpose of business.

4.2 There were number of brokers, who offered discount to persons, who booked pre-launch booking with them. He gave incentives or discount to persons, who had booked order through him.

4.3 The payment for discount was made through account payee cheques only.

4.4 The persons received discount only when they paid the full amount to the builder.

4.5 The assessee in order to support above contention, enclosed details and photocopies of confirmation.

4.6 Hence assessee contended that the entire expenses of Rs. 51, 37, 584 should not be disallowed.

5.    ITAT-Rulings:

5.1 ITAT ruled that if any person receives commission directly or indirectly on behalf of another person for the services rendered, then it would be considered as commission provided such services should not be professional services.

5.2 It further stated that the persons to whom discount was granted by the assessee were not acting as an agent for the assessee; rather they were the purchaser of the property. They have not provided any type of services to the assessee. They have just booked the flat through the assessee.

5.3 Hence assessee is an agent between the builder and the ultimate purchaser of the flats.

5.4 The parting of commission was done by assessee which it actually received from builder and out of that commission some part of commission was diverted to ultimate purchasers as discount  with a view to earn more commission.

5.5 It also contended that the relationship between the assessee and the purchaser of the flat is of buyer and seller.

6.    High Court decision:

6.1  High Court contended that while making payment, discounted price was actually paid by the buyers and hence in these circumstances, the provisions of section 194H cannot be invoked in any manner.

6.2 The assessee parted with a portion of his commission received from the builder for helping the intending buyers of flats. In other words discount was received in the purchase price by the purchasers.

6.3 High Court rather dismissed the contention that purchasers of flats rendered any service to the assessee and said that the assessee rendered services to the intending purchasers.

6.4 The High Court declined to interfere with the findings of learned CIT as no other material was placed to negate such findings. It further pronounced that the provisions of section 40(a)(ia) were not applicable in given case.