ITAT Bangalore: Sales Commission to Directors’ Relatives Allowed When Services Proven, ₹35.38 Lakh Disallowance Deleted
Tribunal says relationship alone cannot invalidate commission payments if business services are genuine.
Judgment strengthens clarity on Section 37, protecting legitimate business expenses from arbitrary disallowance.
By Our Legal Reporter
New Delhi: December 07, 2025:
In a landmark ruling, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has held that sales commission paid to relatives of company directors is allowable under the Income Tax Act if services are proven genuine. The Tribunal deleted a disallowance of ₹35.38 lakh made by the Assessing Officer (AO), who had rejected the claim on the assumption that relatives could not have contributed meaningfully to sales of industrial pumps.
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The ruling reinforces the principle that business expenses must be judged on merit and evidence, not assumptions or bias, and provides clarity for companies facing scrutiny over related-party transactions.
Background of the Case
The case involved CPV Engineer Pvt. Ltd., which had paid sales commission to six relatives of its directors during the assessment year 2014–15.
- The Assessing Officer disallowed the payments, arguing that the recipients did not render services and that three women relatives could not have contributed to sales of industrial pumps.
- The Commissioner of Income Tax (Appeals) upheld the disallowance, citing lack of evidence.
- The company appealed to the ITAT, presenting qualifications, roles, and documentary proof of services rendered.
Tribunal’s Observations
The ITAT made several key observations:
- Relationship is irrelevant: Payments cannot be disallowed merely because recipients are relatives.
- Evidence of services: The company provided proof that recipients were qualified professionals—engineers, MBAs, and science graduates—engaged in technical, administrative, and customer-related functions.
- Bias against women rejected: The Tribunal criticized remarks suggesting women could not contribute to industrial pump sales, calling them “unsupported assumptions.”
- Consistency in assessment: In a later year (AY 2016–17), the AO had allowed 90% of identical commission payments, showing inconsistency in treatment.
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The Tribunal concluded that the payments were genuine business expenses under Section 37 of the Income Tax Act, 1961, and deleted the entire disallowance of ₹35.38 lakh.
Why This Judgment Matters
This ruling is significant for several reasons:
- Protects legitimate expenses: Ensures that genuine business payments are not arbitrarily disallowed.
- Clarifies Section 37: Reinforces that expenses wholly and exclusively for business are deductible, regardless of relationship.
- Encourages fairness: Prevents tax authorities from relying on stereotypes or assumptions.
- Supports corporate governance: Provides clarity for companies engaging relatives in business roles.
Impact on Businesses
For companies, the ruling provides relief and guidance:
- Related-party transactions: Payments to relatives are allowable if backed by evidence of services.
- Documentation essential: Firms must maintain clear records of roles, qualifications, and contributions.
- Reduced litigation: Clear precedent reduces disputes over commission payments.
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Industry experts believe this ruling will encourage businesses to engage qualified relatives without fear of arbitrary disallowance.
Expert Opinions
Tax professionals and legal experts welcomed the ruling.
- Chartered Accountants: Say the judgment clarifies treatment of related-party expenses.
- Lawyers: Stress that evidence is the key factor, not relationship.
- Corporate leaders: Believe the ruling will strengthen family-run businesses.
According to tax analyst CA Vijayakumar Shetty, “The ITAT has rightly held that commission payments cannot be disallowed merely because recipients are relatives. What matters is whether services are genuine and documented.”
Challenges Ahead
Despite clarity, challenges remain:
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- Documentation burden: Companies must maintain detailed records to prove services.
- Risk of misuse: Authorities must remain vigilant against sham transactions disguised as commissions.
- Consistency: Tax officers must apply the law uniformly across cases.
Experts suggest that the CBDT (Central Board of Direct Taxes) should issue guidelines to ensure uniform application.
Global Best Practices
Globally, tax systems emphasize substance over relationship:
- United States: IRS allows related-party payments if services are genuine and documented.
- United Kingdom: HMRC requires proof of services for family payments.
- Australia: Related-party transactions are deductible if commercially justified.
India’s ruling aligns with these practices, strengthening its tax justice framework.
Conclusion
The ITAT Bangalore’s ruling that sales commission paid to directors’ relatives is allowable when services are proven is a milestone in tax jurisprudence. By deleting the ₹35.38 lakh disallowance, the Tribunal reinforced that business expenses must be judged on evidence, not assumptions or bias.
For companies, this ruling provides clarity and protection. For tax authorities, it is a reminder to act fairly and consistently. As India continues to refine its tax framework, this judgment sets a strong precedent for fairness, accountability, and transparency in taxation.
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