The Mumbai Income Tax Appellate Tribunal (ITAT) has upheld the order of the Commissioner of Income Tax (Appeals) (CIT(A)) in a case involving a chit fund company. The dispute centered around the addition made by the Revenue on account of the difference between the “foreman commission” and the “agency commission” paid to agents. The CIT(A) had deleted the addition, stating that there was no clear correlation between the two commissions in the case of a chit fund entity. Additionally, the ITAT noted that the penalty paid for the late filing of the profession tax return was of a penal nature and could not be considered compensatory, thereby disallowing it as a deduction under Section 37(1) of the Income Tax Act.
For the assessment year 2014-15, the chit fund company claimed a commission of Rs. 21 lakh at a rate of 5% of the chit fund as income under the head “foreman commission.” The company also claimed a deduction of Rs. 11,000 as a penalty for the late filing of the professional tax return. The Revenue argued that the company had understated its income from foreman commission by Rs. 8.92 crore and made an addition of Rs. 8.96 crore to rectify the understatement. Additionally, the Revenue disallowed the expenditure of Rs. 11,000 incurred as a penalty for the late filing of the professional tax return.
The CIT(A) partially allowed the company’s appeal. The ITAT relied on the company’s own case for the assessment years 2010-11 to 2013-14, where it was held that the commission earned by the company at a rate of 5% on the total chit fund collection was spread on a month-to-month basis. Furthermore, the agents were paid a commission of 1% of the total chit fund value for each subscriber, subject to the condition that subscribers paid at least four months’ installments. Thus, the ITAT concluded that there was no definite correlation between the foreman commission earned and the agency commission paid. Consequently, it found no illegality or perversity in the CIT(A) order.
Regarding the disallowance of Rs. 11,000 for late filing fees, the ITAT disagreed with the CIT(A)’s finding that it was not of a penal nature. The ITAT reasoned that when the company failed to file the profession tax return on time, it incurred a late fee, which is inherently penal and cannot be considered compensatory. Consequently, the ITAT partly allowed the company’s appeal.
In summary, the Mumbai ITAT upheld the CIT(A) order in favor of the chit fund company, stating that there was no definite correlation between the foreman commission and the agency commission in the case of a chit fund entity. It also ruled that the penalty paid for the late filing of the profession tax return was penal in nature and could not be considered compensatory for the purpose of claiming a deduction under Section 37(1) of the Income Tax Act.