2012 (2) TMI 521 - AT - Income Tax

Trading addition - applying GP rate of 25.5% or 25.01% - Held that - Where provisions of section 145(3) is attracted, then addition should be made taking into consideration the past history of the case. Past history is that assessee declared 24.92% in the last year and in this year GP rate declared is 25.01%. Taking into consideration this aspect and taking into consideration that certain purchases remained unverifiable, we are of the view that if a trading addition of ₹ 4,00,000/- is sustained that will meet the ends of justice. We order accordingly. Ground of the assessee is allowed in part and ground of the department fails. Disallowance of commission expenses - appeal of the assessee was allowed in part by the ld. CIT (A) as he restricted the disallowance of commission @ 20% to the parties whose summons under section 131 could not be served - Held that - In the year under consideration, there are five parties which were involved for assessment year 2006-07 to whom the commission was paid. Total commission paid to these parties was ₹ 5,83,763/- as ld. CIT (A) restricted the disallowance @ 20% on this commission on the basis of his finding for A.Y. 2006-07. Order of ld. CIT (A) for A.Y. 2006-07 was confirmed by the Tribunal. Facts are similar for the year under consideration. Accordingly we confirm his finding on this issue. The ground of the assessee as well as ground of the department fails. TDS u/s 194H - Disallowance under section 40(a)(ia) - non deduction of tax on service fees retained by the bank on credit card transaction - Held that - There is no such relation between the bank and the shop keeper which establishes the relationship of a Principal and Commission Agent. Technically it may be written that bank will charge certain percentage of commission but this is not a commission because assessee sells its goods against credit cards, and on presentation of bills, the bank has to make the payment. It is not the case that bank has advised the assessee to sell their goods to its customers then he will pay the commission. It is reversed in a situation as bank issued credit cards to the credit card holders on certain fees or whatever the case may be and the card holder purchases material from the market through his credit card without making any payment and that shop keeper presents the bill to the bank against whose credit card the goods were sold and on presentation of bill as stated above the bank makes the payment. Therefore, in our considered view, provisions of section 194H are not attracted in this type of transaction. Therefore, we hold that addition made and confirmed by ld. CIT (A) was not justified. Appeal of the department is dismissed.

Summary

Issues Involved:

1. Trading addition by applying GP rate.
2. Disallowance of commission expenses.
3. Disallowance under section 40(a)(ia) for non-deduction of tax on service fees retained by the bank on credit card transactions.

Issue-wise Detailed Analysis:

1. Trading Addition by Applying GP Rate:

The assessee contested the confirmation of a trading addition of Rs. 10,92,695/- by applying a GP rate of 25.5% instead of 25.01%. The Department objected to the reduction of the trading addition from Rs. 89,49,544/- to Rs. 10,92,965/- by the CIT (A), who disallowed 25% of unverifiable purchases amounting to Rs. 3,54,96,161/- after rejecting the books of account. The assessee firm, engaged in trading and export of handicrafts and jewelry, declared a GP rate of 25.01% on sales of Rs. 22,48,51,068/-. The AO held certain purchases as unverifiable and invoked section 145(3), leading to a trading addition of Rs. 89,49,544/-. The CIT (A) upheld the application of section 145(3) but restricted the trading addition to Rs. 10,92,695/- by applying a GP rate of 25.5%, based on previous years' decisions. The Tribunal found no major defects in the books except for unverifiable purchases and concluded that a trading addition of Rs. 4,00,000/- would meet the ends of justice, allowing the assessee's ground in part and dismissing the department's ground.

2. Disallowance of Commission Expenses:

The assessee challenged the disallowance of Rs. 1,16,753/- out of commission expenses, while the Department contested the reduction of the AO's disallowance from Rs. 12,50,749/- to Rs. 1,16,753/-. The AO observed that the sales commission increased disproportionately compared to sales and made a disallowance based on unverifiable self-made vouchers. The CIT (A) confirmed the disallowance of 20% of the commission paid to certain parties, following the ITAT's decision for A.Y. 2006-07. The Tribunal upheld the CIT (A)'s decision, noting that the AO did not issue summons to verify the payments and that the disallowance was consistent with past decisions. Thus, both the assessee's and the department's grounds were dismissed.

3. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax on Service Fees Retained by the Bank:

The assessee contested the disallowance of Rs. 15,17,572/- under section 40(a)(ia) for non-deduction of tax on service fees retained by the bank on credit card transactions. The AO held that the service fees were commission payments liable for TDS under section 194H and alternatively under section 194J. The CIT (A) upheld this view but deleted the addition for payments to American Express Bank due to a general no-deduction certificate. The Tribunal found that the service fees were not commission payments but fees deducted by the bank for processing credit card transactions. It concluded that there was no principal-agent relationship between the bank and the assessee, and thus, section 194H was not applicable. The addition made and confirmed by the CIT (A) was deleted, allowing the assessee's ground.

Conclusion:

The Tribunal allowed the assessee's appeal in part and dismissed the department's appeal, providing a detailed analysis of each issue and applying relevant legal principles and past decisions. The order was pronounced in the open court on 02.02.2012.