1981 (12) TMI 70 - AT - Income Tax

Summary

Issues:
1. Taxability of commission on net profits in the year of accrual.
2. Determination of when commission becomes due for assessment.
3. Impact of audit completion on determining net profits.
4. Consideration of accounting basis for commission income assessment.

Analysis:

Issue 1: The primary issue in this case revolves around the taxability of the commission on net profits in the year of accrual. The dispute arose regarding whether the commission received by the assessees from a company should be assessed in the year it was accrued or in the subsequent year. The assessees argued that the commission should be assessed in the following year as it was receivable only after the company's accounts were finalized. The Income Tax Officer (ITO) contended that the commission became part of the salary and should be assessed on a due basis in the year of accrual. The Commissioner (Appeals) upheld the ITO's decision, stating that the profits had accrued by the end of the company's accounting year, regardless of the actual payment date. The Tribunal analyzed the facts and held that the commission should be assessed in the next year on a receipt basis, as claimed by the assessees.

Issue 2: The crux of the matter was determining when the commission became due for assessment. The assessees, who were directors in the company, argued that the commission was payable only after the accounts were audited and certified by the auditors. The Tribunal considered the significance of the audit completion date in ascertaining the net profits and concluded that the commission should be assessed in the year following the audit completion date, aligning with the assessees' contention.

Issue 3: The completion of the audit played a crucial role in determining the net profits for the relevant year. The Tribunal emphasized that the net profits were not finalized until the accounts were audited and certified by the auditors. The audit completion date was deemed significant in establishing the due date for the commission payment, supporting the assessees' argument for assessment in the subsequent year.

Issue 4: The Tribunal also delved into the consideration of the accounting basis for assessing the commission income. While certain items like house rent allowance or entertainment allowance may be included in the terms of appointment but not fully assessed, the Tribunal differentiated the treatment of commission income. The Tribunal highlighted that the commission payment depended on the earning of net profits, which were determined post-audit completion. Therefore, the commission should be assessed in the year following the audit, as maintained by the assessees.

In conclusion, the Tribunal allowed the assessees' appeals, ruling that the commission on net profits should be assessed in the subsequent year on a receipt basis. The Tribunal emphasized the significance of the audit completion date in determining the due date for the commission payment, aligning with the assessees' contentions and rejecting the department's appeal.