2010 (2) TMI 917 - AT - Income Tax

Non-deduction of TDS on commission payment - assessee s explanation before AO was that it had marketing arrangements with M/s Fab Mall to sell its products. Fab Mall paid for the supplies made to them after deducting the commission. Since amounts were already deducted, there was no scope for the assessee to deduct or recover any tax on such commission Held that - Mere journal entries were passed crediting lump sum amounts by way of sales commission at the end of each month or, in some cases, at the end of several months put together, no evidence of any significance has been led in by the assessee, to show that the transfer of goods to Fab Mall constituted a contract of sale. The assessee has failed to prove that his relationship with Fab Mall is on a principal to principal basis. There has been a mere assertion without any evidence on the part of the assessee. The extract of Fab Mall s account in assessee s books also revealed that assessee is meeting electricity charges pertaining to its outlets within the Fab Mall s stores and as rightly pointed out by CIT(A), this would certainly not be the case if the title of the goods were being transferred in a contract for sale - order of CIT(A) is correct and in accordance with law and no interference is called for, appeals filed by the assessee are dismissed

Summary

Issues Involved:
1. Whether the CIT(A) is justified in confirming the Assessing Officer's action in disallowing deductions under section 40(a)(ia) of the Income Tax Act due to non-deduction of income tax under section 194H.

Detailed Analysis:

1. Disallowance of Deductions under Section 40(a)(ia) due to Non-deduction of Income Tax under Section 194H

Facts:
The assessee, a partnership firm running a cafe, filed returns for the assessment years 2005-06 and 2006-07. During scrutiny, the Assessing Officer noticed that the assessee had claimed deductions for payments made as sales commission to M/s Fab Mall but had not deducted tax at source (TDS) under section 194H. Consequently, the Assessing Officer disallowed the deductions under section 40(a)(ia) and added the amounts back to the total income.

Assessee's Contentions:
- The assessee argued that M/s Fab Mall was not an agent but a purchaser of goods at maximum retail price (MRP), and the amounts debited were discounts, not commissions.
- The relationship between the assessee and M/s Fab Mall was on a principal-to-principal basis, and thus, section 194H was not applicable.
- The amounts were not shown as payable or outstanding in the balance sheet, and since they were paid during the previous year, disallowance under section 40(a)(ia) was not warranted.
- M/s Fab Mall had already paid taxes on the amounts, and disallowing the deductions would result in double taxation.

CIT(A)'s Findings:
- The CIT(A) found no significant evidence to show that the transfer of goods to M/s Fab Mall was a contract of sale. The invoices did not bear M/s Fab Mall's name, and the assessee met electricity charges for outlets within M/s Fab Mall's stores, indicating a principal-agency relationship.
- The amounts credited as sales commission were not merely incorrect nomenclature but actual commissions, as evidenced by the consistent percentage of commission relative to sales month after month.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s order, agreeing that the assessee failed to prove a principal-to-principal relationship with M/s Fab Mall.
- The Tribunal noted that the ledger accounts and journal entries indicated a principal-agency relationship, and the assessee's mere assertions without substantial evidence were insufficient.
- The Tribunal emphasized that the definition of "commission or brokerage" under section 194H includes payments for services in the course of buying or selling goods, which applied to the transactions between the assessee and M/s Fab Mall.

Conclusion:
The Tribunal dismissed the appeals, confirming the disallowance of deductions under section 40(a)(ia) due to the non-deduction of income tax under section 194H. The Tribunal found that the transactions constituted a principal-agency relationship, and the amounts paid to M/s Fab Mall were commissions subject to TDS. The assessee's failure to deduct TDS warranted the disallowance of the claimed deductions.