2014 (7) TMI 1060 - AT - Income Tax

Accrual of income Commission received - Year in which taxable - Credit notes were generated in later year - Held that - The amount received by the assessee was not normal business discount- it was sales-performance based incentives given by the suppliers to the assessee, that the suppliers would be issuing discount notes after the accounting year was closed - It is a normal practice of the business to evaluate the performance and give some kind of incentives to the customers - principles of res-judicata do not apply to income tax proceedings and every AY is a separate unit - the assessee had paid taxes on the income earned by it along with the interest - income from the trade incentives had not accrued to it during the year under appeal that the order of the FAA does not suffer from any legal infirmity Decided against Revenue. Restriction of disallowance on expenses Held that - For disallowing any expenditure AO has to establish that it was not incurred for carrying out the business or that the expenses were not genuine - Merely because certain expenditure was incurred in cash cannot be the basis for making any disallowance - Act does not prohibits cash payments - the AO had not invoked the provisions of section 40A(3)of the Act - entire expenditure was not incurred in cash majority of the payments were by cheques - the genuineness of the expenditure is not in doubt, thus, the order of the FAA does not require any interference from our side Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition on account of trade discount.
2. Deletion of addition on account of commission received.
3. Restriction of disallowance of expenses from 5% to 1%.
4. Ad hoc disallowance under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Deletion of Addition on Account of Trade Discount:
The Assessing Officer (AO) added Rs. 48,17,497/- to the assessee's income for the Assessment Year (AY) 2007-08, arguing that the discount received should be accounted for in the year when related sales occurred, as the assessee follows the mercantile system of accounting. The assessee contended that the credit notes for discounts were received after the financial year ended and were thus offered for taxation in subsequent years. The First Appellate Authority (FAA) agreed with the assessee, stating that the right to receive the income crystallized only after the financial year ended, and thus the amount could not be taxed in the year under consideration. The Income Tax Appellate Tribunal (ITAT) upheld the FAA's decision, emphasizing the consistency in the assessee's accounting method and the absence of revenue loss.

2. Deletion of Addition on Account of Commission Received:
The AO added Rs. 6,05,548/- to the assessee's income for AY 2007-08, arguing that the commission received should be accounted for in the year when related sales occurred. The FAA found that the commission income was offered for taxation in the subsequent year due to the late issuance of credit notes by finance companies. The ITAT upheld the FAA's decision, noting that the income did not accrue within the financial year and thus could not be taxed in the current year.

3. Restriction of Disallowance of Expenses from 5% to 1%:
The AO disallowed 5% of the total expenses incurred in cash, amounting to Rs. 19,50,328/-, arguing that many vouchers were self-made and not conclusively for business purposes. The FAA reduced the disallowance to 1%, considering that the expenses were genuine and incurred for business purposes, and similar expenses were allowed in previous years. The ITAT upheld the FAA's decision, noting that the AO did not establish that the expenses were not incurred for business purposes or were not genuine.

4. Ad hoc Disallowance Under Section 37(1) of the Income Tax Act:
For AY 2008-09, the AO made an ad hoc disallowance of Rs. 25,69,401/- under Section 37(1), which the FAA restricted to Rs. 5,13,880/-. The ITAT found the issue identical to the previous year's disallowance of expenses incurred in cash and upheld the FAA's decision, dismissing the AO's appeal.

Conclusion:
The ITAT dismissed the appeals filed by the AO for all three assessment years, upholding the FAA's decisions on all issues. The ITAT emphasized the consistency in the assessee's accounting method and the genuineness of the expenses incurred for business purposes.