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2010 (7) TMI 615 - AT - Income TaxDisallowance of payment - The assessee had a sales counter in Akbarallys Departmental Stores (hereinafter referred to as ADS) in Fountain and Chembur - Every fifteen days ADS would submit the details of collection made and on the basis of these details the assessee would prepare a bill on ADS and ADS would retain discount at the rate of 20% on the cash sales and 22% on the credit card sales and remit the balance to the assessee - The assessee itself has not been consistent in its description of the payment in its accounts as we see from the profit and loss accounts for the years ended 31-03-2001 to 31-03-2004 compiled in the paper book - For the services rendered by ADS to the assessee compensation was paid in the form of a commission at the rate of 20% in respect of the cash sales and 22% in respect of the credit card sales - In the result the assessee s appeal is dismissed
Issues Involved:
1. Disallowance of payment due to non-deduction of tax under section 194J. 2. Nature of the payment made to Akbarallys Departmental Stores (ADS) - whether it is a discount or commission. 3. Applicability of sections 194C, 194H, and 194J. 4. Validity and applicability of the agreement dated 1st March, 1982. 5. Interpretation of the terms "discount" and "commission" in the context of the Income-tax Act. Detailed Analysis: 1. Disallowance of Payment Due to Non-Deduction of Tax under Section 194J: The primary issue in this appeal was the disallowance of Rs. 8,04,944, which the assessee claimed as a business expense. The Assessing Officer disallowed the payment on the grounds that the assessee failed to deduct tax at source as required by section 194J of the Income-tax Act. The assessee contended that the payment was a discount and not royalty, thus not attracting section 194J. The Tribunal ruled out the applicability of section 194J since royalty was brought under the section only from 13-07-2006, which is after the assessment year in question. 2. Nature of the Payment Made to ADS - Discount or Commission: The assessee argued that the payment was a discount given to ADS for services such as providing space, electricity, packing materials, etc., and not a commission or brokerage. The Assessing Officer and CIT(A) held that the payment was commission, as per the agreement dated 1st March, 1982, which described the payment as commission. The Tribunal examined the agreement and the conduct of the parties and concluded that the payment was indeed commission. The Tribunal noted inconsistencies in the assessee's description of the payment in its accounts over different years, further supporting the conclusion that the payment was commission. 3. Applicability of Sections 194C, 194H, and 194J: The Tribunal ruled out the applicability of section 194C, which covers payments to contractors, and section 194J, which includes royalty payments effective from 13-07-2006. The focus was on section 194H, which covers commission or brokerage. The Tribunal upheld the view that the payment to ADS was commission under section 194H, requiring tax deduction at source. Since the assessee did not deduct tax, section 40(a)(ia) was invoked, leading to the disallowance of the payment. 4. Validity and Applicability of the Agreement Dated 1st March, 1982: The assessee contended that the agreement dated 1st March, 1982, was not in operation during the assessment year. However, the Tribunal found no evidence of termination or abandonment of the agreement. Clauses 3 and 17 of the agreement provided for its termination, but there was no record of either party giving notice to terminate. The Tribunal concluded that the agreement was still in effect during the assessment year. 5. Interpretation of the Terms "Discount" and "Commission": The assessee cited the Kerala High Court judgment in Kerala State Stamp Vendors Association vs. O/o. Accountant General & Others, which distinguished between discount and commission. The Tribunal acknowledged the difference but found that the payment in question was not a discount on sales but a commission for services rendered by ADS. The Tribunal noted that the agreement and the conduct of the parties indicated that ADS acted as the assessee's agent, and the payment was for services incidental to sales, thus qualifying as commission. Conclusion: The Tribunal upheld the disallowance of Rs. 8,04,944, concluding that the payment to ADS was commission under section 194H, and the assessee's failure to deduct tax at source attracted section 40(a)(ia). The assessee's appeal was dismissed, and the payment was not allowed as a deduction. The Tribunal emphasized that the true nature of the payment must be determined from the agreement and the conduct of the parties, rather than the description in the accounts.
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