Annually the Income tax department verifies the accuracy of the income tax returns filed by taxpayers by sending scrutiny notice to them. This is aimed at ensuring that the taxpayer has not understated the income or has not computed excessive loss or has not an underpaid tax.
Scrutiny notice received by an individual can be grouped into limited scrutiny or complete scrutiny. Under limited scrutiny, a taxpayer is only required to submit details with respect to specified transactions/query for which scrutiny has been initiated. whereas under complete scrutiny, a tax officer can ask the taxpayer to furnish an exhaustive list of documents/information, which he feels is relevant for a detailed audit of the tax return.
In order to issue scrutiny notice, tax department follows certain pre-determined criteria (e.g. substantial tax refunds, foreign tax credit, etc.) for selecting cases for scrutiny. Scrutiny cases are also being selected under Computer Aided Scrutiny Selection (CASS) based on broad-based selection parameters.
The income tax return can be picked up for scrutiny within 6 months from the end of Financial Year (FY) in which the return was filed. For example, if the tax return for FY17-18 was submitted on July 31, 2018, scrutiny notice can be issued by September 30, 2019.
Scrutiny notice requires a physical visit by a taxpayer or his authorized representative (i.e. chartered accountant, tax lawyers etc.), however, off-late in order to promote efficiency, transparency and accountability, income tax authorities have launched the ‘e-proceeding’ facility. Under this, the government has mandated income tax officers to take recourse to electronic communications for all limited and complete security cases.
Scrutiny of a tax return is a regular process and a taxpayer should not panic upon receiving scrutiny notice. Some key check points which help in responding to notices include
1.Verifying details on the notice such as name,
2.Permanent Account Number (PAN)
3.The FY for which the same has been issued, along with details of the jurisdiction of the tax officer.
It is important to review and arrange all documents depending on the type of scrutiny notice issued (e.g. computation sheet, Form 16, details of interest earned, Form 26AS, etc.) before the reply is submitted.
The scrutiny notice prescribes a date by which the requested documents/information need to be furnished to the tax officer/uploaded into the e-filing website. It is advisable that in case the requisite documents are not ready by the said date, then a request letter for adjournment is submitted to the tax officer seeking additional time to collate and submit the required documents/details. In all correspondences with tax authorities, it is important to quote the PAN and the FY.
It should also be kept in mind that the tax department has a mechanism in place to collate the details of major transactions carried out by a taxpayer during a particular FY. In case, at the time of filing of tax return any error was committed, the tax payer has an option to disclose the same before the tax officer.
It is also important to note that the tax officer has the right to complete the scrutiny on ‘Best Judgement’ basis as he deems fit as per the information available with him in case he is not satisfied with the details submitted before him or if full particulars of information sought, has not been submitted to him as per his satisfaction.
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1. All You Need To Know About Filing ITR With Or Without Form 16
1. Introduction
Section 50C in the Income tax Act, 1961 was inserted in the Act by the Finance Act, 2002 w.e.f. 1.4.2003. The scope and effect of such insertion have been elaborated in the following portion of the department Circular No.8 of 2002, dated 27th August, 2002, as under:-
a. Computation of capital gains in real estate transaction –The Finance Act, 2002, has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property.
b.It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value of the consideration and capital gains shall be computed accordingly under section 45 of the Income-tax Act.
c.It is further provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revisions or reference before any authority or Court, the assessing officer may refer the valuation of the relevant asset to a Valuation officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the assessing officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation officer is more than the value adopted or assessed for stamp duty purpose, the assessing officer shall not adopt such fair market value and shall take the full value of consideration to be the value adopted or assessed for stamp duty purpose.
2. Amendment to Section 50C
Some changes in the section by the Finance (No.2) Act, 2009 after the amendment provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed
[ (w.e.f. 1.10.2009) or assessable] by any authority of a State Government (Hereinafter in section 50C referred to as the ‘stamp valuation authority’) for the purpose of payment of stamp duty in respect of such transfer.
In such a situation, the value so adopted or assess [(w.e.f.1.10.2009) or assessable] shall for the purpose of section48 be deemed to be the full value of the consideration received or accruing as a result of such transfer
The object and purpose of section 50C is to see that the undisclosed income of Capital gains received by the assessee is taxed and the law should not encourage and permit the assessee to peg down the market value to avoid tax. – Vide Gouli Mohadevappa v. ITO (2013) 356 ITR 90 (Karn).
3. Whether value adopted for stamp duty purposes under section 50C shall apply for other heads of income also
The reply to this has to be in the negative. In Inderlok Hotels (P) Ltd.v.ITO (2009) 318 ITR 234 (Mum-Trib), it was held that on analyzing language used by legislature in section 50C, it appears that the said section specifically deals with transfer of ‘capital asset’ being land or building or both, and it provided for replacing value adopted or assessed for the purpose of stamp duty more particularly under section 48 in place of value or sale consideration shown by assessee. It is abundantly clear from Explanation given in CBDT Circular No.8, dated 27.08.2002 that basis intention to insert section 50C is for purpose of determining full value of sale consideration for purpose of computation of capital gains under section 48.
4. Applicability of section 50C to exemptions provided by sections 54 to 54G
These sections provide for exemption from capital gain in respect of long term capital gains arising from the transfer of prescribed conditions. The issue is whether the ‘full value of consideration’ referred in section 54F would be the full value as received by the assessee or as determined under section 50C of the Act. The legal position is that full value of consideration shall be as consideration received by the assessee and not as determined by the assessing officer for the purpose of application of section 50C of the Act. This view is supported by the Tribunal’s decision in the case of ITAT’s Lucknow Bench’s decision in the case of Anant Chetan Agarwal v.Dy.CIT, Circule-I, Bareilly (2018) 172 ITD 525 (Luck-Trib)
5. Tribunal’s Decision
(i) Facts
The assessee sold an agricultural land (capital asset being situated within 9 kms from the municipal limit of Bareilly) for a consideration of Rs.27.46 lakh, Value of which as per circle rate was Rs.58.06 lakh. The assessee claimed deduction under section 54F amounting to Rs.27.46 lakh, i.e. entire net sale consideration. The investment made in the house property as claimed under section 54F was examined by the Assessing Officer and the assessee was required to explain as to why the capital gain on entire consideration of Rs.58.06 lakh (as per provision of section 50C) may not be charged. The assessee submitted that whatever sale consideration was received by him, has been invested under section 54F and therefore provision of section, 45, 48 and 50C applies to the case of the assessee and deduction under section 54F is not applicable. The assessing officer was of the opinion that section 45 and 48 are charging sections and provisions of section 50C were applicable as per the fair market value determined by the DVO. The matter was referred to the DVO by the assessing officer and DVO determined the fair market value of the property at Rs.40.61 lakh as against value of circle rate amounting to Rs.58.06 lakh. On appeal the Commissioner (Appeals) Confirm the order of the assessing officer.
(ii) Tribunal’s order
The Tribunal has decided that section50C specially mentions that for the purpose of section 48 value adopted as assessed for the purpose of stamp duty shall be deemed to be full value of consideration received or accruing as a result of transfer, meaning thereby, deeming fiction created in section 50C is limited only to the extent and for the purpose of section 48 and this deeming fiction cannot be extended or interpreted as meant for the purpose of other provision of the Act including section 54F. There is a doctrine of impossibility of performance wherein it is only to the extent of funds available with the assessee that he can be expected to invest. On perusal of section 54F, what is, therefore, relevant is the investment of the net consideration in respect of original asset which has been transferred and whether net consideration is fully invested in the new asset. The net consideration as determined under section 50C based on the stamp duty authority valuation is not a consideration which has been received by or has accrued to the assessee. Where the entire consideration received has been invested in the new asset, the provisions of section 54F(1)(a) have been complied with by the asessee and therefore, assessee become eligible for deduction in respect of whole of the capital gains to be computed under section 45, read with section 48 and 54F (1) (a)
In view of the provision of law as explained (supra), the Tribunal set aside the order of Commissioner (Appeals) and decided the appeal in favour of the assessee.
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1. All You Need To Know About Filing ITR With Or Without Form 16
In the last few years, we’ve observed the emergence of people making videos related to education, fitness, tips/ideas/classes related to business, reviews of movies,books, gadgets etc and upload it on online platforms like YouTube. This is termed as Vlogging.
The more people view & engage on the videos, the more money the vlogger makes. Having said this, there are a few vloggers, who are uncertain about their tax implications.
Before we step into that, how do people make money by uploading?
1. Payment from YouTube for audience engagement ( based on reach, views & comments)
2. YouTube ads
3. Consultancy services on video making, designing and optimisation
4. Affiliate sales or other freelance income from YouTube
How does the income of vlogger be taxed?
*Remember, you will be taxed as a sole proprietor unless you register your business as a company, LLP or Partnership Company.
Tax provisions' applicability depends on the source and nature of income. A YouTuber’s income is considered as business income.
Being a service sector business, the assesses can only opt for normal provisions under the Income Tax Act,1961. If the gross total income exceeds Rs 1 crore, then section 44AB i.e., tax audit will be applicable to the YouTuber. Additionally, Tax Deducted at Source(TDS) provisions will also be applicable to you on every receipt of payment. You can view your TDS amount through 26AS, which can be generated electronically.
If your gross turnover is below Rs 1 crore, then you have to follow the normal tax provisions to calculate taxes and maintain books of accounts. But if your gross total income exceeds Rs 1 crore, you must follow all bookkeeping requirements under Rule 6A and get your accounts audited by a Chartered Accountant(CA) under section 44AB of Income Tax Act,1961. You will have to pay taxes on the net taxable income after considering all the business expenses and depreciation as per the income tax slab applicable to you.
You may also have to pay advance tax if your total tax liability is more than Rs 10,000 in a financial year. You have to pay advance tax in four instalments given your tax liability is more than Rs 10,000 in a financial y year (FY).
Starting from June 15 , 15 percent of the advance tax has to be paid. Then by September 15, you should have paid 45 percent, by December, 75 percent of the advance tax liability and by March 15, 100 percent of it.
You have to pay your advance tax liabilities by the due date after considering the amount of TDS that has been already deducted from payments made to you. This TDS can be cross-checked from Form 26AS.
Don’t forget to claim the below expenses
a. General Expenses: If you can submit the required bills, expenses directly related to earning your income are fully deductible. It includes your internet bill, costs incurred for computer or camera maintenance and any other cost for creating and uploading the videos.
b. Other Expenses: Costs to promote and market your video expenses.
c. Depreciation: Please remember that the expenditure of assets cannot be deducted completely deducted against your income. For instance, you can only claim 15 percent depreciation of the camera price and 60 percent depreciation of the cost of the laptop.
In case you have calculated your taxes under normal provisions and tax audit does not apply i.e., your gross total income is less than Rs 1 crore, you will have to file your income tax return by July 31 of the assessment year. For assesses who are subject to tax audit, the return filing deadline is usually September 30 of the assessment year.
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1. All You Need To Know About Filing ITR With Or Without Form 16
2. Due Date For Filing Income Tax Return & Consequences Of Not Filing IT Return Within Due Date
3. Cash Transaction Under Income Tax Law
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Table of Contents
1. Background
2. Legal Provisions
3. Mixed supply and Composite Supply
4. Discussion and Findings
5. Composite Supply
6. Conclusion
7. Author’s View
1. Background
The assesee is running a shop where it sale and serve sweetmeats, namkeens, cold drinks and other edible items and also restaurant. The dilemma here is related to classification of the supply, whether the supply by the assesse will fall in the supply of goods or supply of services. Additionally one needs to find out the applicable tax rate and admissibility of input tax credit to the assessee.
2. Legal Provisions
In order to identify classification of the supply narrated above, it is essential to understand the relevant provisions of law as per the CGST Act, 2017.
Section 2 deals with the definition of the term used in the said Act, the relevant definition are as under:-
(30) “Composite Supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary, course of business, one of which is principle supply;
(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
(74) “ Mixed supply “ means two or more individual supplies of goods or services or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply
(90) “Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;
(102) “Service” means anything other than goods. Money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
3. Mixed supply and Composite Supply
The concept of mixed or composite supply has evolved from the concept of naturally bundled service which was explained in the Education Guide issued by the C.B.E. & C. in the year 2012 (the Education Guide) and the same is borrowed in explaining the meaning of naturally bundled service under GST law vide CBEC Flyer No.4 dated 01.01.2018. The relevant extract is reproduced as under for ease of reference:
“Bundled service” means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport service provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.
The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’
Under GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified with distinct characteristics as : -
(i) Composite Supply
(ii) Mixed Supply
If we look at the definitions (supra), composite supply is one where two or more goods or services or both are supplied together, in a natural bundle and in a normal course of business, provided one of which is a principal supply. However, principal supply will be that supply which is predominant over other supplies. This means that the goods and services and bundled owing to natural necessities. The Composite supply is taxed at the rate applicable to the principal supply whereas a mixed supply means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price of these items can be supplied separately and is not dependent on any other. In Mixed Supply, the combination of goods and /or services is not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business.
In order to identify if the particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply. As a corollary, it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business, then it would be Mixed Supply. Once the amenability of the transaction as a composite supply is ruled out, it would be a mixed supply, classified in terms of a supply of goods or services attracting highest rate of tax.
4. Discussion and Findings
In view of advance ruling given in the case of sweet-shop-cum restaurant, the services from the restaurant is a principle supply which provides a bundled supply of preparation and sale of food and serving the same and therefore, it constitutes a composite supply. It further satisfied the following conditions of a composite supply;
(i)Supply of two or more goods or services or both together
(ii)Goods or services or both are usually provided together in the normal course of business.
In the instant case the nature of restaurant services is such that it may be treated as the main supply and the other supplies combined with such main supply are in the nature of incidental or ancillary services. Thus restaurant services get the character or predominant supply over other supplies. Therefore, in the present case the supply shall be treated as supply of service and the sweet shop shall be treated as extension of the restaurant in as much as the said activity covered under Schedule II of the said Act and the relevant portion of the same read as under:-
5.Composite Supply
The following composite supplies shall be treated as a supply of services, namely:-
(a) Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) where such supply or service is for cash deferred payment or other valuable consideration.
Further, as the activity is classified as “restaurant services,” the same falls under Heading 9963 of GST rates on services under Notification No.11/2017-Central Rate (Tax), dated 28.06.2017 (as amended time to time) and the relevant portion of the same is reproduced as under:-
Heading 9963 (Accommodation, food and beverage services) –
(i)Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purpose having declared tariff o any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent.
Explanation. – “declared tariff” includes charges for all amenities provided in the unit of accommodation (Given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.
Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.
6. Conclusion
Thus, in view of the above discussion, the classification of supply shall be of restaurant services and the rate of GST on aforesaid activity shall be 5% as on date and input tax credit shall not be admissible on the goods and services used in the said activity in terms of aforesaid notification.
7. Author’s View
The author of this article partly differs on the ground taken by the AAR in deciding the issue. It seems that the AAR has decided the issue by considering the overall supplies made by the sweet shop-cum-restaurant as bundled supply and has accordingly decided the issue. The inference has been withdrawn by AAR on the basis of mixed supply and composite supply. The author is of the view that the concept of mixed and composite supply. The author is of the view that the concept of mixed and composite supply steps in when there are more than one supply for a single price to a single person. This ruling needs further discussion and revision.
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Establishing a new business as an entrepreneur is not a cake walk especially when faced with competition from other entrepreneurs who are already flourishing in business. Many a times, a budding entrepreneur faces hindrances not in the product or marketing but in financial and compliance aspects. An advice and consultation in such scenarios overcome these obstacles. Here are a few recommendations that can be beneficial in your endeavours:
Create Opportunities:
Set a target that needs to be achieved. Work on creating adequate opportunities through conceptualizing, figuring potential problems that might occur during the business venture and come up with solutions to overcome them. It is advised to avoid acting upon assumptions when it pertains to business ventures. In addition to this, it is recommended to conduct a SWOT (Strength Weaknesses Opportunities Threat) analysis.
Direct and Indirect Tax Consultations:
In case of a budding entrepreneur, due to revenue stress the financial planning can be demotivating. With the assistance of Direct Tax Consultants, who can find adequate solutions for your queries you can overcome these issues. They assist in developing a multifaceted financial strategy which corresponds to your agenda like improving working capital positions, optimising tax positions and cutting costs. Indirect tax consultants provide advice and assistance in handling GST issues for new businesses, such as filing and payment of GST and availing input credit on GST.
Attention to Minute Details:
Issues like conditioning the network connections, maintaining a brand value, upholding a strong social media exposure and providing commendable customer service must not be ignored in order to avoid future business depressions. Also being affirmative about the dedication of the employees to the company is paramount for its continued progress.
Handle Setbacks with Maturity:
Don't give up when your targets aren't met. Weigh out your options in a mature way. No business is immune to failures. The entrepreneur needs to make mature decisions with a long term view rather than try to maximise gains in the short term. We at ADCA provide financial advisory services in Bangalore and have a structured approach to creating solutions to the difficulties faced by entrepreneurs.
Concluding Remarks
Business planning, tax and compliance are best left to financial, direct tax and indirect tax experts rather than the startup trying to cover these in-house.
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Table of Contents
1. Payment of commission or brokerage liable for TDS under section 194H
2. What constitutes commission for the purpose of section 194H
3. Payment in nature of discount not liable to TDS under section 194H
4. Meaning of ‘Discount’
5. Recent decision in EPCOS India (P) Ltd.’s case
6. Conclusion
1. Payment of commission or brokerage liable for TDS under section 194H
Section 194H provides for deduction of tax at source from any income by way of commission or brokerage to a resident. Accordingly any person, not being an individual or a Hindu undivided family, who is responsible for paying, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five percent.
2. What constitutes commission for the purpose of section 194H
Explanation (i) to section 194H, explains the meaning of the term commission or brokerage. Accordingly, “Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.
3. Payment in nature of discount not liable to TDS under section 194H
The following case law may provide guideline as regards nature of transaction:-
(I)Discounts paid by a manufacturer to its distributors for supply of its products to the retailers cannot be categorized as ‘Commission’. Thus, there is no liability upon the assessee to deduct tax at source on such discount payment under section 194H- Vide Addl.CIT v. Pearl Bottling (P) Ltd.2012 TaxPub(DT) 1042 (Visakha-Trib) : (2011) 46 SOT 133 (Visakh-Trib).
(II) No TDS under section 194H was required to be deducted on discount given to dealers as it would not be treated as commission or brokerage as they are not commission agent – Vide Hero MotoCorp Ltd. v. Addl.CIT 2013 TaxPub (DT) 2242 (Del-Trib) : (2013) 60 SOT 25 (Del ‘C’-Trib) : (2013) 156TTJ (Deb ‘C’-Trib) 139.
(iii) Assessee was not required to deduct tax at source under section 194H on discount given to customers on booking of air tickets because the same was a reduction on the sale price and not a commission – Vide ITO v. Kesar Travels ltd. 2014 TaxPub (DT) 3646 (Mum-Trib) : (2014) 34ITR (Trib) 124 (Mum ‘J’-Trib)
(iv) Provisions of section 194H could not be attracted where retail customers or group customers as well as small agents to whom concession was given by assessee-Airlines agents would only be ‘discount’ and not ‘commission or brokerage - Vide Asstt.CIT v.Al Hind Tours & Travels (P) Ltd. 2014 TaxPub (DT) 2662 (Coch-Trib) : (2014) 64 SOT 1 (Coch-Trib).
(v) The discount on MRP granted by the assessee to distributors at the time of sale of the drugs/medicines (i.e goods) does not fall within the ambit of section 194H. Therefore, no tax was required to be deducted at source thereon – Vide ITO v. Unichem Laboratories Ltd. 2016 TaxPub(DT) 2199 (Mum-Trib).
(Vi) Where assessee was paying annual and quarterly discounts to stockiest/dealers on their achieving sale-linked targets and stockists were also providing additional services for such increase in sales, such discount could not be termed as commission, therefore, section 194H could not be applied, based on the facts that sale was made to stockists on principal-to- principal basis and providing of such additional services would directly benefit to stockists themselves – Vide Bajaj Consumer Care ltd.v. Dy.CIT 2016 TaxPub(DT) 2561 (Hyd-Trib).
4. Meaning of ‘Discount’
Discount in general terms, is a deduction from MRP of an article and it is given to attract the customers. Sometimes, such deduction is made in order to provoke the customers to make payment in cash and sometimes it is given when bulk purchases is made.
Discount is generally claimed as deductible expenditure under Profit & Loss account of the assessee. Controversy often arises as regards interpretation and distinction between terms discount and commission because discount is not required deduction of tax at source whereas commission is liable for TDS under section 194H. Generally when transaction is in nature of direct sale transaction on principal to principal basis, TDS obligation does not arises as no commission is involved in such transaction.
5. Recent decision in EPCOS India (P) Ltd.’s case
In EPCIS India (P) Ltd.v.ITO IT Appeal No.2533, 2758 (Kol.) of 2013 & 688,1325,1718 & 1895 (Kol.) of 2014, (Kol ‘C’-Trib) dt 02.02.2018 (2018 TaxPub (DT) 859 (Kol ‘C’- Trib), the assessee claimed certain expenses under the head “trade discount and cash discount” as there was a contract between he assessee and its customers which was based on principal to principal basis. But the assessing officer disallowed the same by contending that amount of discount offered by the assessee was nothing but commission expenses which is liable for deduction of tax at source under section 194H of the Act.
The assessing officer during the assessment proceedings observed certain facts as detailed under:
(i)The amount of discount offered to the customers was subject to various terms and conditions therefore it partake the character of commission.
(ii) The amount of discount was settled by the assessee by issuing credit note to the customers. These credit notes were issued to the customers only on the happening of the particular event/activity such as receipt of payments made by the customers. Thus the discount offered by the assessee is in the nature of commission.
(III) The discount was also offered to the customers on account of prompt payment made by dealers to the assessee. This again reflects that the discount is related to providing some services like prompt payment.
(iv) The amount of commission offered by the assessee is directly linked/related to its liquidity which proves that these are not normal discount offered by the assessee but represents the amount of commission.
(v) The terms and condition between the assessee and its customers is of principal and agent.
On appeal before Commissioner (Appeals), it was submitted that the contract of sale between the assessee and its customers/dealers is based on principal-to- principal basis. Therefore, the transaction between the assessee and its customers represents the sale purchase activities. Thus the discount offered can not be termed as commission under section 194H of the Act. The Commissioner (Appeals) directed assessing officer to allow deduction as claimed by assessee by contending that the offering of discount for purchasing the quantity in bulk by the customers cannot be treated as payment of commission to the customers specially when the sale is happening on a principal to principal basis.
I further appeal before the Tribunal, it was held that the assessee has been supplying goods to its dealers on principal to principal basis as evident from the agreement. Therefore, there was no relationship between the assessee and its customers as of principal and agents. Therefore, the amount of discount offered by the assessee could not be termed as commission under section 194H. Moreover, the issue of discount offered by the assessee has been duly settled by the Hon’ble Supreme Court in the case CIT.v.Ahmedabad Stamp Vendors Association 2012 TaxPub(DT) 2662(SC) : (2012) 348 ITR 378 (SC) wherein it was held as under:
“We are satisfied that 0.50% to 4% discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said discount is in the nature of cash discount.
In the circumstances, we concur with the impugned judgment that the impugned transaction is a sale. Consequently, section 194H of the income Tax Act, 1961 has no application.”
There is no dispute that the discount was offered by the assessee to its dealers in relation to the sales made by it to them.Thus the provisions of section 194H does not apply to the impugned discount offered by the assessee. Thys, there is no reason to interfere in the order of learned Commissioner (appeals).
6. Conclusion
Whenever deduction is given to customers for purchasing goods in bulk quantity, it would form part of discount in transaction of sale. Hence, on such discount there would be no liability to deduct tax at source under section 194H.
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Table of Contents
1. Introduction
2. Two methods of accounting generally followed
3. Section 145 of the ACT-method of accounting
4. When accounts of an assessee cab be rejected by the AO?
5. Method of accounting and computation of profit/Loss in the case of construction contracts
6. Tribunal’s decision in the case of Ashoka Hitech Builder (P) Ltd.v. DCIT (Central) –I, Indore (2018) 172 ITD (Ind-Trib)
7. Concluding comments
1. Introduction
Section 145 of the Income Tax Act, 1961 (Act, for short) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assesse. This leads to the decision as to what are the various method of accounting, which an assesse can adopt?
2. Two methods of accounting generally followed
There are two methods of accounting, which are generally prevalent mercantile and cash system. In order to further clarify the same principle, section 43(2) defines the word ‘paid’ to mean ‘actually paid or incurred’ according to the method of accounting upon the basis of which the profits or gains are computed under the head “Profits and gains of business or profession.” When books of account are maintained on the basis of mercantile system, income is taxable and expenditure is deductible on ‘due’ basis, whereas, if books of account are kept on the basis of cash system, income is taxable on ‘receipt’ basis and expenditure s deductible on payment basis. Earlier up to 31.3.1997, the assesses were permitted to follow ‘hybrid’ system of accounting, i.e. combination of both cash and mercantile system, but this is prohibited since 1.4.1997 when section 145 was substituted by new section 145 by the Finance Act, 1995.
3. Section 145 of the ACT-method of accounting
This section, for ready reference, is reproduced below:
(1)Income chargeable under the head “Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provision of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesse.
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income.
(3) Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assesse, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assesse or income has not been computed in accordance with the standards notified under sub-section (2) the assessing officer may make an assessment in the manner provided in section 144.
4. When accounts of an assessee cab be rejected by the AO?
The circumstances in this regard have been stated in sub-section (3) (supra) and these are:
*When the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee; or
*Where the method of accounting provided in sub-section (1) has not been regularly followed by the asessee; or
*Income has not been computed in accordance with the Standards notified under sub-section (2)
In such circumstances, the assessing officer has been empowered to make an assessment in the manner prescribed under section 144 of the Act to the best of his assessment. In other words, he has to first record findings on the aforesaid aspects before rejecting the assessee’s method of accounting – cash or mercantile.
5. Method of accounting and computation of profit/Loss in the case of construction contracts.
The institute of Chartered Accountants of India (ICAI) has prescribed vide AS-7 two methods of revenue recognition in the case of construction contracts. These are:
If an assessee engaged in construction business follows any of the above methods for computation of his profit regularly, the same cannot be rejected by the assessing officer for making assessment of his income under the income Tax Act.
Now, the government has specified ICDS-III, which deals with construction contracts and recognises only the percentage completion method.
6. Tribunal’s decision in the case of Ashoka Hitech Builder (P) Ltd.v. DCIT (Central) –I, Indore (2018) 172 ITD (Ind-Trib)
In the background of legal position, as stated earlier the Tribunal’s decision can be examined to indicate how assessing officers, occasionally make assessments disregarding the legal position, as stated earlier, leading to proliferation of litigation unnecessary, putting the assessee to uncalled for hardship, expense and waste of time and energies, to no-one’s benefit. The facts and other relevant aspects emerging from this decision are analysed in later discussion.
(i) Facts
The assessee, whose case was before the Tribunal, was engaged in the business of purchase/Sales/development of land, real, estate and infrastructure and construction and civil work. The issue linked to the grounds raised in this appeal related to agreement dt – 01.04.2009 entered into between the assessee and M/s.JSM Devcon (P) Ltd. The assessee is the owner of 2,039 hectare of land and the same was given for development to M/s. Devcon (P) Ltd. As per the terms and conditions of the development agreement, the developer will construct various high-rise buildings on the land and in consideration for allowing the development of land, the assessee company will be entitled to 32% of the total saleable constructed area, to be constructed by the developer. It was decided that entire revenue shall be shared in the ratio of 68:32 as decided in the development agreement. On examination of the audited accounts of the assessee, it was revealed that the assessee has not reflected any revenue from sale of units, however, it was getting advance against sale from the developer from 2010-11 onwards.
(ii)The assessee’s case and AO’s response
It was submitted by the assessee during the assessment proceedings that it is consistently following project completion method and has offered the revenue for tax in the year in which sales have been effected and the sale deeds, registered. However, the assessing officer was not convinced with the submission made by the assessee and he applied the method adopted by M/s.Devcon (P) Ltd, i.e. the percentage completion method on the assessee and calculated the income of the assessee applying the ratio of 68:32 as agreed in the agreement. The assessing officer took the basis of financial data of M/s.JSM Devcon (P) Ltd., which has accounted for the revenue on the basis of percentage completion method as per the guidelines prescribed by the ICAI.
(iii)Appeal before the CIT (A)
Aggrieved assessee filed appeal before the Commissioner (Appeals) against the method and Commissioner (Appeals) confirmed the action taken by assessing officer observing as follows:
“I have gone through the assessment order, the appellant’s contentions and the audited accounts of M/s.JSM Devcon (P) Ltd. In the assessment year under consideration, the appellant company has not reflected any revenue from the operations in the profit and loss account. During the course of assessment proceedings, the appellant company, in response to the query for not recognizing revenue in the books of account, had furnished the following reasons:
(i)The company has been recognizing revenue on the basis of sales deeds executed at the time of full payment coupled with possession of the apartment.
(ii)Advance have been received from various customers on the basis of schedule given in the allotment letter, which specifies that instalment shall be paid on completion of a particular level of activity. The amount so received is liable to refund and the possession shall be given at the time of execution of the sale deed.
(iii)In the transaction of advance received from customer, there is no transfer of property as envisaged in section 2(47) of the Income Tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882.
(iv)Similar type of accounting method (mercantile) has been followed by the assessee from year-to-year.
(iv)Tribunal’s decision
The Tribunal posed the issue as to whether a person is mandatorily required to adopt percentage completion method or not and then, referring to section 145 of the Act and in the background of that and facts of the case, has decided that where project completion method had been consistently followed by assessee, land owner and it had been accepted by revenue authorities in case of assessee for previous year, assessing officer was not justified in applying percentage completion method on assessee for one year on selective basis merely because it had been followed by its developer.
7. Concluding comments
Such unfettered exercise of discretion by assessing officers, as has been done by the assessing officer in the case before the Tribunal, shows making assessment on the basis of whims and fancies of the assessing officers, who are quasi-judicial authorities without regard to legal provisions. If the assessing officer wants to alter the method of accounting consistently followed by an assessee, he can not do so arbitrarily on the ground that some other assessee follows a different method for computing profit from construction contracts. He has to give proper notice in regard to what he proposes to do, give adequate opportunity to the assessee to have his say and if he does not agree with the same, reject the assessee’s contentions by a speaking order. He cannot make assessment, deviating from the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the assessee has entered into the agreement as a joint venture for development and the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the development and the method of accounting applied by JSM DPL is binding on the assessee also. No such requirement is prescribed either under the Income Tax Act or by ICAI. He cannot function like an autocrat in the matter of making assessments unmindful of legal requirement and discard the method of accounting regularly followed by an assessee without giving any convincing justification merely on the ground that he must switch to the method to that of his co-developer merely because he feels that he should do so.
Such haphazard and arbitrary decisions by assessing officers need to be curbed by the CBDT by suitable instructions. Recently, the DG (Vig) with the concurrence of Chairman, CBDT, has issued instructions to CIT (Appeals) to regulate their way of functioning on the lines stated, which is, in a way, interference in the functioning of CsIT(A), which the CBDT is not authorized to do, there seems to be no reason why the malfunctioning of the ITOs indicated by the case before the Triunal (supra) cannot be regulated. Hence, immediate instructions to the assessing officers seem urgently called for.
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1. Meaning of Prior Period Expenses
Prior period expense are generally those expenses which are relating to the current year in the sense they are crystalised during the year, though relating to activities of an earlier year.
For accounting purposes these are generally known as prior period items and required to be shown separately.
2. Allowability of expenditure in year of crystallization
Normally where mercantile system of accounting is followed, expenses relating to relevant year are accounted for in that year. However prior period expenses had to be allowed in subsequent years because the expenses were crystallized only in that year.
A liability though pertaining to earlier year, is said to accrue when it actually crystallises, is ascertainable and legally enforceable. Refer to, Wolkem (P) Ltd. v. CIT (1996) 54 TTJ (JP-Trib) 414, Kumar Aerosoles (P) Ltd. v.CIT (1996) 55 TTJ (Del-Trib) 385 and Sarvaraja Textiles Ltd.v. CIT (1995) 54 ITD 612 (Hyd-Trib).
In Bearingpoint Property Services (P) Ltd.v.Dy.CIT 2014 TaxPub (DT) 4064 (Bang ‘B’ – Trib) : (2014) 35 ITR (Trib) 177 (Bang ‘B’-Trib), it was held that in the light of the admitted position that the expenditure in question was wholly and exclusively for the purpose of business and that the same was genuine, the fact that the expenditure relates to an earlier period could not be a ground to deny the deduction, especially when factually crystalisation of liability during the previous year had not been disputed. Therefore, the expenses claimed by the assessee were directed to be allowed, as such these expenses were allowed though related to prior period.
Where prior period expenses on account of repair and maintenance were related to earlier years but crystallized when bills were received during current year, same were to be treated as current year’s expenses and hence allowable – Vide Dy.CIT.v.Enercon India Ltd. 2016 TaxPub (DT) 2867 (Mum ‘E’-Trib) : (2016) 48 ITR (Trib) 362 (Mum ‘E’ – Trib).
When the department was taxing prior period income, deduction of expenses, which had crystalized during the relevant previous year, should have also been allowed to the assesses. In a going concern, certain bills are received late and pertained to the business transaction and are crystalized during the relevant accounting period. These types of expenses are revenue in nature and are allowable in the previous year in which they are crystalized - Vide Dy.CIT v.Khurana Engineering Ltd. ITA No. 571 (Ahd) of 2010 (Ahd ‘D’ – Trib).
3. Expenditure incurred as continuous flow
It was a continuous process to incur expenditure and to account for in the books of account. Therefore, even though they were treated technically as prior period expenses, it related to a continuous flow of expenditure. Therefore, there was no justification in disallowing the expenditure, otherwise normally eligible for deduction – Vide Union Bank of India v. Asstt. CIT (2011) 49 SOT 32 (Mum ‘B’ – Trib) Also see, Bank of India v. Dy.CIT (2012) 139 ITD 493 (Mum ‘B’- Trib).
Where prior period expenses were debited on basis of receipts of bills and were in the nature of routine expenses duly authorized by company’s authorized body, the same could not be disallowed on the basis of tax audit report – Vide DCM Limited v. DY.CIT 2015 TaxPub (DT) 4649 (Del ‘B’ – Trib).
4. Expenditure to be disallowed where assessee failed to prove as to crystallization in current year
In Asstt.CIT v.Adani Wilmar Ltd.2014 TaxPub(DT) 3727 (Ahd ‘B’ – Trib): (2014) 64 SOT 122 (Ahd ‘B’- Trib), it was held that while upholding the disallowance of the expenses, the Commissioner (Appeals) has noted that the assessee had not submitted any evidence to prove that the expenses crystallized during the year either before assessing officer or before the Commissioner (Appeals). The statement of expenses very clearly indicated that the expenses were related to assessment year 2000-01. Therefore there was no reason to interfere with the order of the Commissioner (Appeals) disallowing the prior expenses, after offsetting the income of earlier year. Also see, Gujarat State Fertilizers and Chemicals Ltd.v.ACIT (2013) 1 ITR (Trib) – OL 540 (Ahd).
Assessee had failed to establish that the related expenses were actually crystallised during the year under consideration. Since assessee was following the mercantile system of accounting it has to establish that these liabilities pertaining to the previous year were actually crystallised during the year under consideration. Since the assessee had failed to do so the order of Commissioner (Appeals) was sustained – Vide Dy.CIT v.Cosmo Films Ltd & Ors. (2012) 13ITR (Trib) 340 (Del ‘B’-Trib): (2012) 139 ITD 628 (Del ‘B’- Trib).
Since assessee had failed in proving crystallization of prior period expenditure which included professional fee during the relevant year, assessing officer was justified in disallowing deduction claimed by assessee – Vide Adani Gas Ltd.v. ACIT 2016 TaxPub (DT) 843 (Ahd-Trib).
5. Information as regards expenses with evidence where received after closure of accounts
In State Bank of Bikaner * Jaipur v.Asstt.CIT 2014 TaxPub (DT) 4331 (Jp-Trib) : (2014) 166 TTJ (JP-Trib) 244, the assessing officer observed that as per audit report, prior period expenses had been debited to Profit and Loss Account. It was held that the genuineness of the expenses had not been doubted by the lower authorities. Thus, these expenses of previous year were allowable in respective year to which they pertained but information as regards such expenses with evidence was received by the assessee from the various branches after closing of books of account. Hence, these expenses are allowable during the year under consideration.
6. ICDS vis-à-vis prior period expenses
The notified ICDS does not provide anything on allowability of prior period expenditure. Hence, it can be presumed that the treatment of prior period expenditure shall be decided as per judicial precedents and the provisions of the Act.
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