ITAT Delhi on Commission Disallowance: Assumptions Not a Substitute for Evidence
Background of the Dispute
The decision in Brivan Consultants Private Limited Vs ACIT (ITAT Delhi) deals with cross appeals filed by both the assessee and the Revenue against a common appellate order dated 21.06.2024 passed by the CIT(A) for AY 2018–19. The scrutiny assessment had been completed under Section 143(3) of the Income Tax Act 1961 by the ACIT, Central Circle-31, Delhi.
Brivan Consultants Private Limited is a private limited company providing financial consultancy in areas such as accounting, auditing, taxation, treasury, assurance, and business advisory services. During AY 2018–19, the assessee diversified into a new line of activity – trading in bonds – specifically to tap business opportunities with a large institutional client, U.P. State Bridge Corporation Ltd. EPF Trust.
In the course of assessment, the Assessing Officer scrutinized substantial commission payments made to 77 persons engaged for sourcing bonds from various sellers, which were ultimately sold to the said EPF Trust. The Assessing Officer doubted the genuineness of these commission expenses, leading to major additions and consequential litigation up to the Tribunal.
Core Facts: Commission Payments and AO’s Doubts
Commission Transactions Under Question
- The assessee carried out bond trading for the first time during the relevant year.
- To execute these trades, the assessee engaged a network of intermediaries, brokers and contacts for:
- Identifying sellers in the secondary bond market
- Liaising for negotiations
- Facilitating closure of deals with U.P. State Bridge Corporation Ltd. EPF Trust
- Overall bonds sold to the EPF Trust amounted to ₹1,18,75,49,043.
- Commission aggregating to ₹5,11,63,000 was paid to 77 parties, largely through banking channels, after deduction of TDS.
AO’s Verification and Initial Findings
- Notices under
Section 133(6)were issued to all 77 commission recipients. - Only 17 parties responded; 60 parties did not reply.
- Statements of certain brokers were recorded, and the AO highlighted two main “discrepancies”:
- In several cases, the income declared in the return of income nearly matched the commission received from Brivan Consultants Private Limited.
- Bank statements reflected quick withdrawal or onward transfer of commission amounts via self-cheques or intra-family accounts (including HUFs).
On the strength of these features, the AO treated the entire commission as non-genuine, alleging a “concerted scheme” to inflate expenses and evade tax.
Assessee’s Explanation Before the AO
The assessee explained that:
- It had historically been in financial consultancy only and had no prior experience in bond trading.
- During the year, the assessee used its existing networking and liaison capabilities to approach U.P. State Bridge Corporation Ltd. EPF Trust to expand its consultancy business.
- While consultancy work did not materialize, the assessee was given an opportunity to deal in investment products, particularly bonds, on a secondary market basis.
- Lacking expertise in the bond market, the assessee relied on:
- Brokers
- Market agents
- Intermediaries
- Other contacts
who helped in identifying counterparties and closing bond trades.
- All commission payments were made through banking channels and after TDS deduction, and the underlying bond transactions were fully documented.
Despite these submissions, the AO remained unconvinced and proceeded with major disallowances.
Additions Made by the Assessing Officer
1. Disallowance of Commission – ₹5,11,63,000
The AO concluded that the entire commission outgo of ₹5,11,63,000 was bogus, relying mainly on:
- Non-response by 60 out of 77 parties to
Section 133(6)notices - Similar wording of replies from those who did respond
- Commission recipients’ ITRs showing income nearly limited to this commission
- Pattern of withdrawals from bank accounts
- Large number of HUFs and related parties among recipients
The AO characterized the arrangement as a deliberate plan to:
- Artificially reduce taxable income
- Give a “veneer of genuineness” by deducting TDS
- Circulate money through intermediaries
Accordingly, the AO disallowed the full commission amount and also proposed penalty under Section 270A(8) for misreporting of income.