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).
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.
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.
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.
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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