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Issues: Disallowance of commission claimed by the assessee-company.
The judgment by the Appellate Tribunal ITAT CALCUTTA involved a dispute regarding the disallowance of commission claimed by the assessee-company. The company, incorporated in 1976 with the main objective of exporting goods from India, appointed agents in foreign countries to expand sales. The agreements with agents stipulated that commission would be payable only upon full realization of sale proceeds of exported materials. During the accounting period, the company exported goods, and commission became payable based on the realized value. However, the Income Tax Officer (ITO) disallowed a portion of the claimed commission, which was upheld by the Commissioner (Appeals). The company contended that commission accrued as soon as agents placed orders and services were rendered, irrespective of payment realization. The revenue argued that liability accrual depended on the right to file a suit for payment, which was contingent on full payment realization. The Tribunal analyzed the agreement terms and previous legal precedents to determine the timing of liability accrual for commission payment. The company's counsel argued that under the mercantile system of accounting, commission income accrued to agents upon order placement and service completion, not upon payment realization. They contended that the clause in the agreement requiring full realization of sale proceeds before commission payment did not affect the timing of liability accrual. The revenue, however, maintained that liability accrual depended on the right to sue for payment, which was contingent on full payment realization. The Tribunal noted that under the mercantile system, liability accrual depended on service completion unless specified otherwise in the agreement. The agreement's clause requiring full realization for commission payment indicated that liability accrual was contingent on payment realization, not just service completion. The Tribunal compared this case to a previous Supreme Court judgment regarding managing agency commission, emphasizing that income accrual required a right to enforce payment in court. Therefore, the Tribunal upheld the Commissioner (Appeals)'s decision to disallow the commission claimed by the assessee-company. In conclusion, the Appellate Tribunal ITAT CALCUTTA ruled on the disallowance of commission claimed by the assessee-company, emphasizing that under the mercantile system of accounting, liability accrual for commission payment depended on the agreement terms. The Tribunal found that the clause in the agreement requiring full realization of sale proceeds before commission payment indicated that liability accrual was contingent on payment realization, not just service completion. Citing a previous Supreme Court judgment, the Tribunal emphasized that income accrual required a right to enforce payment in court. Therefore, the Tribunal confirmed the decision to disallow the commission claimed by the assessee-company.
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