COMMISSIONER OF INCOME TAX-II vs J B EXPORTS

C/TAXAP/1348/2011 JUDGMENT DATED: 19/10/2026
(GJHC240454442011)
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 1348 of 2011

FOR APPROVAL AND SIGNATURE:


HONOURABLE MR. JUSTICE BHARGAV D. KARIA

and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

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Approved for Reporting Yes No
✓
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COMMISSIONER OF INCOME TAX-II
Versus
J B EXPORTS
==========================================================
Appearance:
KARAN G SANGHANI(7945) for the Appellant(s) No. 1
RULE SERVED for the Opponent(s) No. 1
==========================================================
CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

Date : 19/10/2026

JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1.Heard learned Senior Standing Counsel Mr.
Karan G. Sanghani for the appellant.
2.
This Tax Appeal is filed by the Revenue under
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section 260A of the Income Tax Act, 1961 (For
short “the Act”) against the judgment and
order dated 29.04.2011 passed by the Income
Tax Appellate Tribunal, Ahmedabad Bench, “D”
(For short “the Tribunal”) in ITA
No.3206/AHD/2007 for Assessment Year 2004-
2005. Tax Appeal was admitted vide order
dated 16.08.2012 by this Court formulating
the following substantial question of law:
“Whether the Appellate Tribunal is
right in law and on facts in allowing
the commission payment to the foreign
agent when the assessee has failed to
prove it beyond doubt the requirements
as required under section 37 of the
Act?”
3.
Brief facts of the case are that the assessee
was engaged in the business of export of
Textile items. It was noticed by the
Assessing Officer that the assessee has
suppressed the sale proceeds by an amount of
Rs.9,86,96,411/- in the name of payment of
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commission to foreign party. As per Assessing
Officer, the assessee has not explained the
details of the foreign party and the reason
why the said commission was paid, and
therefore, Assessing Officer was of the view
that the assessee has reduced the sale price
by the alleged amount of commission at the
rate of 10% to 12.5%. The Assessing Officer
was further of the view that the assessee has
recorded the net value of sale proceeds and
the sale proceeds shown as per the books of
accounts were amounting to Rs.73,72,01,551/-
and the sale proceeds were stated to be
"netted export turnover" after reducing the
amount of commission. Accordingly, the
Assessing Officer passed the assessment order
under section 143(3) of the Act dated
29.12.2006 holding that the commission was
debited in the export invoice notionally and
the claim of commission in the export invoice
was false. The Assessing Officer has also
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mentioned that the accounts have not been
written as per the accounting principles and
that the guidelines issued by the Institute
of Chartered Accountant have not been
followed. The trade discount or commission
should not have been deducted from the sales
directly and the same was wrongly accounted
for in the books of accounts by the assessee.
It has also been pointed out by the Assessing
Officer that during the proceedings a bank
realization certificate was produced by the
assessee certifying that no remittance of
commission from India was ever made. However,
explanation of the assessee was that only net
FOB value was received. The Assessing
Officer also found that the assessee availed
extra credit of DEBP on the turnover and the
assessee had intentionally declared the
amount as commission and not as a trade
discount in the GR forms to obtain the
benefit of credit of DEPB. The Assessing
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Officer has concluded that such amount is to
be added to the total income of the assessee
being suppression of sale because while
claiming the DEPB, the assessee had shown
gross sale proceeds as export turnover.
4.Being aggrieved by the assessment order
passed by the Assessing Officer, the assessee
preferred an appeal before the CIT(Appeals)
who affirmed the view taken by the Assessing
Officer assigning few more reasons as under:
“I have considered the submission
and have gone through the details
filed. The explanation filed by the
appellant that only net sales rate
has been charged from the foreign
buyer and that the net amount was
recorded in the books of accounts
appears to be a vague explanation.
There is no reason as to why the
actual sale price i.e. the gross
amount of sales was not taken into
the books of accounts. The sale
proceeds have been reduced by 10% or
12.5% in the form of commission.
There is no explanation as to whom
this only net amount has been
realized from the customer is
accepted then it would have been a
trade discount and not commission.
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However, that is not the case here
because the appellant never claimed
it as a trade discount and has
always claimed it as a commission.
The term "commission" is generally
understood as an amount which is
allowed as compensation to a third
party for services rendered by him.
For earning "commission" there must
be an agent who sells or buys goods
for one of the parties and who
receives remuneration in the form of
"commission" for services rendered
on behalf of the appellant. In the
case of the appellant, there is no
existence of a third party as has
been categorically claimed by the
appellant that it ever paid nay
"commission" to any one. In the
relationship of a buyer and seller,
no services by the buyer which could
entitle him to earn "commission"
from the seller. The absence of a
third party in the case of the
appellant makes it totally
incongruous to claim payment of
"commission" to the buyer who has
not rendered any other services than
making a purchase from the seller
and paying him the proceeds of such
sales. It is further seen that the
entries in the books of accounts are
not as per accounting standards of
principles of accounting. It is also
important to note that there is no
remittance of commission form India.
The invoice/ bills clearly show that
there is deduction and the bank has
also confirmed it. In fact, the
appellant has preferred the
commission amount to be deducted
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from the invoice value itself sue-
motto, as permissible under the RBI
guidelines, irrespective of actual
obligation or compulsion. Hence, it
can be said that the appellant has
not directly paid/remitted the
commission and as such the
expenditure pertains to the
appellant only.
At a future stage, the appellant may
claim that there was 'diversion of
income by over riding title' of the
foreign buyer but this argument
would be misplaced and based on
flawed, interpretation of the Law.
Payment of Commission is clearly
"appellant of income" and his
doesn't satisfy the doctrine of
diversion of income. Here the
commission has been claimed to
accrued to the appellant in its
entirely (gross), and subsequently
the commission portion was deducted
by the foreign buyer as claimed by
the appellant. It has been held by
the Hon'ble Supreme Court in the
case of Associated Power v CIT 218
ITR 195 that doctrine of diversion
of income applied only when the
profit earned by the assessee is not
really his profit but it belongs to
somebody else and the assessee has
no title on it. In the instant case,
the income in its entirety belongs
to the appellant and appellant is
just applying some part of its
profit towards commission expense
allegedly paid to the Foreign Buyer.
There is no prior claim of the buyer
on the income.
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During the hearing proceedings the
appellant has contented that he has
received only net amount on the
sales i.e. the actual receipt of the
appellant as billed sales value
minus commission. Therefore, there
was no need of showing commission in
the Profit & Loss Account and sales
at gross value in the Trading
Account. Further, as the appellant
has not received the gross amount,
only the net amount should be
considered for the taxation purpose.
It is to be seen as to what should
be the accounting treatment of
commission paid and whether the
sales should be taken at gross of
net; and whether the taxability
arises with respect to net receipt
only or to the gross value of bill.
Commission is an expenditure for the
purpose of accounting. Therefore,
when the appellant incurs
expenditure of Rs. 'A' on account of
commission account is to be debited
by the corresponding amount. In such
case, the journal entry would be:
Commission account...debit......Rs.A
To Cash Bank account……….....Rs.A
In the instant case, where the
amount has been deducted from the
invoice value, the journal entry
will be:
Buyer Party account.. Debit. Rs. B
To Commission account.. Debit. Rs. A
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To Sales account…...Rs. A+B
After the above journal entry, the
Buyer Party account would go to
Balance Sheet (under the head
'Debtors), the Commission account is
transferred to the Profit & Loss
Account and the Sales account
transferred to Trading account. But
the instant case, the appellant has
taken the sales proceeds at the
lower value, (B-A) only and has not
shown the Commission (A) in the
Profit & Loss Account. So, even
though the accounting identity is
maintained and the balance still
matches, a distorted and incorrect
picture of Trading as well as the
Profit & Loss Account emerges.
Netting off of the commission with
sales that leads to complete
vanishing of commission head from
the Profit & Loss Account is an
incorrect and unacceptable
accounting treatment. In fact, a
trading account entry can be net off
with an entry of trading account;
for example, 'trade discount' can be
net off with the purchase or sales.
Similarly, a Profit & Loss Account
entry can be net off with an entry
of Profit & Loss Account; for
example, interest paid' can be net
off with interest received'. But an
item of entry of Profit & Loss
Account can never be netted off with
an entry of trading account. Section
44 AB of the I.T.Act clearly,
mentions the words 'total sales' and
'gross receipts'. So, showing the
sales at net value is not correct
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and it may lead to the violation of
the law. For example, if an
appellant has actual sales turnover
of RS. 40 lakhs and he deducts 10%
commission amount from sales, his
turnover would be reduced to Rs.36
lakhs and as a result, audit would
not be compulsory. Similarly, if an
appellant has export turnover of Rs.
10 crores and he deducts 10%
commission form sales, then at Rs. 9
crores, he would be out of the
effect of Taxation Law Amendment
Act, 2005. Thus, it is evident that
the netted off results represented
improper and incorrect accounts.
Further netting off of commission
from sales is not in accordance with
the Accounting Standard I, which is
notified under the Income-tax Act.
Even Part II of Schedule VI to the
Company Act, which has been referred
in the Income-tax Act and included
in Appendix One of the Act, does not
permit the appellant to hide the
payment of commission in the Profit
& Loss Account. The argument of the
appellant that since he has received
only the net amount cannot be
charged for what he has not received
is also without any basis. The
appellant is to be taxed on its
total income and section 5 defines
total income as under.
"the total income of any previous
year of a person who is a resident
includes all income from whatever
source derived which---
(a) Is received or is deemed to be
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received in India in such year by on
behalf of such person, or
(b) accrues or arise or is deemed to
accrue or arise to him in India
during such year: or
(C) Accrues or arises to him outside
India during such year."
Therefore, the appellant is to be
charged on its total income on
accrual basis. Even if he doesn't
receive the income, he has to pay
tax on accrual basis. The commission
is not sort of trade discount. At
some point of time, it cannot be
argued that the appellant has
ignorantly shown the trade discount
as commission; because as per the
RBI guidelines, on up to 12.5% of
commission amount, the appellant is
getting extra credit of DEPB, which
is not applicable in case of trade
discount. Thus, the appellant has
intentionally declared the allegedly
paid amount as commission and not as
a trade discount in the G.R. forms.
There is no ambiguity about the
nature of commission. It is neither
a trade discount nor any kind of
incentive. The appellant has been
failed to prove that transfer of
amount relating to commission by
deduction from invoice value is not
for avoiding the liability to
taxation.
The document of "ARE-I" which is
certified by the 'Customs Department
reflects the amount of the
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assessable gross value payable on
the goods for working out the gross
customs or excise payable and the
export commission is a deductible
amount in export business provided
the genuineness of such commission
payment to a third party or an agent
is established. It is also important
to note that as per Institute of
Chartered Accountants guidelines,
trade discount can be deducted from
sale but not the commission allowed
to the third parties. Since in the
instant case, the appellant has not
the commission being paid to a third
party, the propriety of claim of
such commission in export invoice is
questionable, since it could not
have been paid to the foreign buyer
itself. Another important point to
be kept in mind is that as per the
RBI circular No.3 dated 01.07.2003
issued to authorized dealers in
foreign exchange, the dealers may
allow payment of commission and such
remittance on agency commission may
be allowed, if the amount of
commission was declared on the
specified form and accepted by the
Custom Authorities and if the
commission was not declared on such
a form, remittance could be allowed
after satisfying about the reasons
adduced by the exporter for not
declaring such commission on Export
Declaration Form, provided a valid
agreement between the exporter and
the beneficiary for payment of such
commission subsists. Here, in this
case, no such written agreement
between the appellant and the so
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called recipient of commission has
been furnished nor is any remittance
of such commission as admitted by
the appellate itself. The commission
also not be presumed to be a trade
discount, since the appellant itself
has claimed it to be a commission
paid to the buyer of goods. It is
also relevant to mention here that
when gross sales proceeds have been
shown to the Customs & Excise
department in "Shipping bill" for
export of goods under DEPB Scheme
ignoring the alleged commission
payment, in that case the total sale
proceeds cannot be reduced by the
amount of so called commission and
shown at reduced figure of sale
proceeds to the Income Tax
Department. It cannot be an
acceptable argument that only with a
view to get benefit of DEPB, the
appellate has shown gross sales less
commission to the Department. The
appellate cannot be allowed to go
back on his own statement and
documentary evidence used by him and
furnished before different
authorities. Therefore, no credence
can be given to such a shifting
stand. The documentary evidence in
the form of sale invoices clearly
revealed the sale amount which has
been admitted by the appellate to be
proved and therefore it is pointless
to mention the reduced amount of
sale value in the book of accounts.
The RBI guidelines allow a
commission up to 12.5%, when the
appellate could get an extra credit
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of DEPB which is not available in
the case of a trade discount. Since
the said amount is neither a
commission nor a trade discount, it
would mean that the said amount has
been reduced from the sale price of
goods without any jurisdiction. This
would imply that there is over
invoicing of the sale price in order
to get extra credit of DEPB and
sales have been suppressed. The so
called commission allowed to the
buyer might have been kept in
reserve which the buyer or someone
else abroad to be utilized at a
future date for the purpose of
import or some other
benefit/expenditure. I am therefore
of the considered view that no
commission has been paid to any one
and this is just a colorable device
to reduce the value of sales
proceeds & evade due taxes thus it
is abundantly clear that this is a
case of suppression of total sale
value and therefore addition of Rs.
9,86,96,411/- made on this account
by the AO is hereby confirmed.”
5.
Being aggrieved by the order passed by
CIT(Appeals), the assessee preferred an
appeal before the Tribunal. The Tribunal
following the decision of this Court in case
of Commissioner of Income Tax-II v. Atma
Prakash Batra (judgment dated 21.12.2010
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passed in Tax Appeal No.838 of 2009) allowed
the appeal of the assessee holding that the
assessee is entitled to claim of commission
payment to foreign agent under section 37 of
the Act.
6.
This Court in case of Atma Prakash
Batra (supra) has held as under:
“13. In relation to proposed
question No.2, which relates to
deletion of disallowance of claim of
export commission in the sum of
Rs.3,83,37,678/-, during the
assessment proceedings, from the
copies of the invoices filed by the
assessee, the Assessing Officer
found that in export sale invoices,
there was a deduction under the head
“Commission” of 11.5% or 12% and
after deducting the said amount, net
figure of sale was worked out. The
total amount of net sales was
Rs.28,74,85,387/-, but as per
accounting standards, the amount of
export commission should have been
reflected on the credit side by
showing gross sale minus commission
and the net sales would be in as
outer column on the credit side of
the manufacturing account. The
assessee also did not furnish any
agreement for paying such commission
nor did it file any proof of such
remittance routed through the
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Reserve Bank of India (RBI). The
foreign agents' commission was
allowable upto 12% under the Central
Excise & Customs Rules, while giving
DEPB benefit, but the same was
required to be proved beyond doubt
as required by the RBI guidelines.
Further, the assessee received
payment from foreign buyers after
six months and the assessee could
not take the plea that the foreign
agents received payment of
commission directly from the buyer,
since unless there was a due for
making payment for purchase, no
amount of commission would become
payable and no one would pay such
commission in advance. The Assessing
Officer further observed that names
and addresses of foreign agents did
not confirm the actual payment and
therefore, disallowed the claim of
commission.
xxx
20. The Tribunal after considering
the rival submissions and after
appreciating the evidence on record
found that the receipt of commission
amount had been duly confirmed by
the agents which in turn meant that
the amount which had been deducted
from the invoice value actually
represented commission payments
which were finally received by the
agent. This had been done in
accordance with the terms and
conditions agreed upon between the
buyers and the seller, even though
there was no formal agreement. The
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agents had unequivocally confirmed
and reconfirmed the nature of the
transactions and that the absence of
any formal agreement could not be
held to be a ground to dismiss the
claim of the assessee. There were
clear contra confirmations from the
agents. Thus, once the genuineness
of the commission as well as its
justification of having been wholly
and exclusively incurred for the
purpose of assessee's business was
established, the same becomes
admissible as deduction under
section 37(1) of the Act. The
Tribunal was of the view that it
could not be held that the gross
invoice amounts were what had
accrued to the assessee, and that
these were the amounts on which the
assessee should have been assessed.
According to the Tribunal, the
outgoing commission from the invoice
values would have to be reduced from
the gross amounts, and the net
amount which was the actual sum
received by the assessee in India,
and which was duly certified and
permitted by the RBI and its
authorized dealer, was what had been
earned by the assessee from such
transactions. The Tribunal further
found that the commission was not
deducted from the export invoices in
an ad hoc manner and it was clearly
under an agreement between the buyer
and the seller, as also between the
buyer and the agent. Consequently,
the assessee was under an obligation
to deduct commission from the gross
invoice value. In the present case,
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there was a compulsion to deduct the
commission from the export invoices
which was clearly indicated in the
confirmation letters of the agents,
and that the ingredients which were
necessary for such deduction of
commission to be treated as
diversion of income by over riding
title was clearly present. It was
further found that in the present
case, the gross export proceeds
never reached the assessee, no such
income had therefore accrued to the
assessee and this was because of an
obligation or compulsion to deduct
the commission from the export
invoices which clearly showed this
to be a case of diversion of income
by overriding title. The amounts
deducted from the export invoices
were thus clearly allowable as
deduction.
21. As regards the findings of the
lower authorities that the
confirmations issued by the parties
were on plain paper, the Tribunal
after appreciating the evidence on
record has found that except one
party, namely, Mohmed Abdulla of
Dubai, all other communications were
on letter heads of the respective
parties. It was further found that
none of the payments had come beyond
six months, but the same were within
six months as could be verifiable
from bank realization certificates
enclosed annexed in the paper book.
The Tribunal recorded that each of
the transactions between the
assessee as the seller and the two
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buyers were mediated by agents,
whose existence was established
beyond doubt, by the confirmation
letters. Secondly, there was
tendering of services. The agents
had clearly written that they had
rendered services; in procuring
samples, deciding the orders and
settling all matters between the
buyers and seller including payments
by the buyers to the seller. The
existence of the agents and their
functioning was for the benefit of
the assessee as well. The Tribunal,
accordingly, was of the view that
the claim of the assessee towards
commission payment deserves to be
allowed.”
7.
Applying the decision of co-ordinate Bench of
the Tribunal in case of Shri Sanjay Jain
being ITA No.1533/Ahd/2008 for Assessment
Year 2004-2005 vide order dated 16.12.2009,
has also allowed the claim of the assessee
for payment of commission to foreign buyers
by directly reducing from sale invoice, as
such method was adopted in light of
regulations of the RBI and prevailing export
and import policy.
8.
The Tribunal has also considered the decision
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of co-ordinate Bench in case of M/s. Jawahar
Bio-tech Pvt. Ltd v. DCIT being ITA
No.4364/Ahd/2007 for Assessment Year 2005-
2006 vide order dated 21.08.2009 in similar
facts and thereafter held that the issue is
squarely covered by decision of this Court in
case of Atma Prakash Batra (supra) decided in
favour of the assessee allowing the claim of
the assessee for commission paid to the
foreign buyers considering the facts of the
case.
9.
In view of findings of fact arrived at by the
Tribunal as well as decision of this Court in
favour of assessee in case of Atma Prakash
Batra (supra), in the facts of the case, the
assessee has reduced the sale price by the
amount of commission at the rate of 10% to
12.5% by recording sale proceeds in the books
of accounts as Net export turnover after
reducing the amount of commission. In similar
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facts this Court in case of Atma Prakash
Batra (supra) has held that when the amount
is duly confirmed by the agent which in turn
meant that the amount which had been deducted
from the invoice value actually represented
commission payments which were finally
received by the agent and thereafter allowed
the claim of the assessee towards commission
payment.
10.
In view of the foregoing reasons, the
question of law is answered in favour of the
assessee and against the Revenue. Appeal is
accordingly dismissed.
(BHARGAV D. KARIA, J)
(NIRZAR S. DESAI,J)
RAGHUNATH R NAIR
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