INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Commission on account of 'client referral' - Assessee failed to prove expenditure being incurred wholly and exclusively for purpose of business

Assessee claimed expenditure in respect of commission paid to an entity 'D' on account of 'client referral'. AO stated that the assessee was unable to produce any agreement with D nor was the assessee able to show the type of services rendered by D. Further, the AO stated that a letter was issued to D and the said company responded that it received the commission but the letter was silent regarding the specific query of the services rendered by D to the assessee. It was a further submission that D also filed copies of six bills said to have been raised on the assessee but the assessee produced only one single journal entry passed in respect of the said expenditure. Consequently, the AO disallowed the said commission as the assessee failed to prove that the expenditure was incurred wholly and exclusively for the purpose of the business. Held: Assessee failed to produce any evidence to show what was the reference done by D and the quantum of turnover on account of such reference. Further, once the reference was made and the products of the assessee were of the top notch quality, the turnover should have been climbing instead of falling back to earlier levels, which clearly showed that the assessee was unable to prove the purpose of the payment to D much less that it was wholly and exclusively for the purpose of its business. Further, the assessee was not able to place any agreement between it and D to prove that the expenditure was incurred wholly and exclusively for the purpose of its business. Therefore, the assessee failed to substantiate much less proved the reason for the payment of the so-called 'referral commission' and hence, the same was disallowed.

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2012-13

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