2018 (3) TMI 1093 - AT - Income Tax

Addition on account of negative cash balance - Held that - This issue needs reconsideration at the level of the Assessing Officer for the reason that the assessment is to be made on the basis of negative cash balances by adopting the method of peak credit but peak credit has to be taken on daily basis and not on monthly basis as taken by the CIT(A). Before us learned counsel for the assessee stated that entire details have been filed in respect to peak credit on daily basis even which were filed before the Assessing Officer and the CIT(A). We are of the view that we have no mechanism to verify each and every entry to ascertain the position of negative cash balance on the basis of peak credit on daily basis. Disallowance of discount on commission received from BSNL to retailers - Held that - From the figures submitted by the assessee regarding details of discount it is clear that around 5% commission was given by the assessee but Assessing Officer has wrongly worked out the percentage as 6.10%. We find that even the CIT(A) has restricted the discount at 80% which in our view is not the right procedure. In view of above facts and details submitted by the assessee we are of the view that nothing is to be disallowed because the working given by the assessee regarding commission at 5% on recharge coupons is within the perfect limits. Accordingly we delete the addition completely and allow this issue of the cross-objection of the assessee. This issue of Revenue s appeal is dismissed. Application of provisions of Section 40A(3) in respect to purchase of sim cards recharge coupons - Held that - Issue to be decided in favour of assessee as relying on case of Vodafone Essar Cellular Ltd. Vs. Asstt.CIT 2010 (8) TMI 691 - KERALA HIGH COURT as held relationship of principal/agent is there and appellant is getting only commission out of it. Hence there is no sale purchase and section 40A(3) is not attracted. Not allowing credit for income surrendered during the course of survey - Held that - As appellant has himself credited unaccounted income in books of account after surrendering it during survey A.O. should have given credit of such disclosure to appellant vis-a-vis undisclosed income determined by A.O. for the current assessment year. But appellant has already taken cash and deposited it in its books and all the additions made by A.O. in this order are on issues not related to survey viz. stock difference or any specific defect to be given set off amongst this suomoto crediting of cash of five lakhs. Hence I do not find any reasons to telescope the addition made by A.O. to the extent of 5 lakhs surrendered by the appellant and immediately credited in cash book that is separate undisclosed income offered by the appellant not related to issues raised by A.O. in assessment.

Summary

Issues Involved:
1. Restriction of addition by CIT(A) based on peak credit method.
2. Disallowance of discount on commission received from BSNL.
3. Application of Section 40A(3) of the Income Tax Act concerning purchases of sim cards and recharge coupons.
4. Credit for income surrendered during the course of survey.

Detailed Analysis:

1. Restriction of Addition by CIT(A) Based on Peak Credit Method:
The primary issue was whether the CIT(A) was correct in restricting the addition of ?41,17,986/- made by the Assessing Officer (AO) to ?13,88,604/- by adopting the peak credit method on a monthly basis rather than a daily basis. The AO had noted a peculiar pattern in the assessee's sale account, recording cash sales of ?20,000/- per day or less, leading to unexplained negative cash balances. Upon appeal, the CIT(A) partially accepted the assessee's claim and estimated the negative peak on a monthly basis. The Tribunal found that the assessment should be based on daily peak credit rather than monthly, necessitating a remand to the AO for fresh consideration. Hence, the issue was allowed for statistical purposes.

2. Disallowance of Discount on Commission Received from BSNL:
The AO had disallowed ?6,67,480/- of the discount claimed by the assessee on BSNL commissions, arguing that the discount was inflated to reduce taxable income. The CIT(A) reduced this disallowance to ?1,78,009/- based on the assessee's claim that 80% of the commission received from BSNL was passed on to retailers. The Tribunal found that the AO's disallowance lacked basis and that the CIT(A)'s restriction was not the right procedure. It concluded that the detailed break-up of discounts and commissions provided by the assessee justified no disallowance. Thus, the Tribunal deleted the addition entirely, dismissing the Revenue's appeal on this issue.

3. Application of Section 40A(3) of the Income Tax Act:
The AO disallowed ?1,48,02,811/- under Section 40A(3) for purchases made in cash. The CIT(A), referencing the Kerala High Court's decision in Vodafone Essar Cellular Ltd. vs. ACIT, held that the relationship between the assessee and BSNL was that of principal and agent, not buyer and seller, thus Section 40A(3) was not applicable. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and allowing the assessee's cross-objection.

4. Credit for Income Surrendered During the Course of Survey:
The assessee contested the CIT(A)'s decision not to allow credit for ?5 lakhs surrendered during the survey. The Tribunal noted that the assessee failed to demonstrate how the surrendered amount related to the additions made by the AO for negative cash balance and disallowance of interest. The CIT(A) found no grounds to telescope the surrendered amount with the additions made by the AO. The Tribunal upheld the CIT(A)'s findings, confirming that the surrendered income was unrelated to the issues raised by the AO.

Conclusion:
The Tribunal remanded the issue of peak credit to the AO for fresh consideration on a daily basis, deleted the disallowance of discounts on BSNL commissions, upheld the CIT(A)'s decision regarding the non-applicability of Section 40A(3), and confirmed the CIT(A)'s refusal to allow credit for the surrendered income. The appeals were disposed of accordingly, with decisions pronounced in the open court on 05.03.2018.