2011 (12) TMI 105 - HC - Income Tax

Addition on account of dis-allowance of cash discount method of accounting Held that - The Assessing Officer took a very myopic view and had opined that the assessee should have followed the net accounting system and not gross accounting system . - Assessee has right to adopt an accounting system of his choice. - Interference is permissible if the accounting system adopted is contrary to the prescribed accounting standards etc. under Section 145/145A of the Act. - Decided in favor of assessee. In respect of payment of commission assessee has duly established that sufficient services were rendered for the payment of the commission involved in this regard. He has also deducted TDS and filed TDS returns and furnished PAN number of most of the parties. Therefore, expenses are allowed as deduction. - Decided against the revenue.

Summary

Issues:
1. Addition of Rs. 31,26,718 on account of failure to justify and explain cash discount.
2. Disallowance of commission payment to 16 persons.

Issue 1: Addition of Rs. 31,26,718 on account of failure to justify and explain cash discount:

The first issue in this case revolved around the addition of Rs. 31,26,718 due to the failure of the assessee to justify and explain the nature of cash discount. The Assessing Officer disallowed this amount, stating that the assessee had not accounted for the cash discounts properly and failed to prove that full credit for cash discounts received had been given. However, the CIT (A) and the Tribunal overturned this decision, accepting the stand of the assessee. The CIT (A) noted that the appellant provided cash discounts to customers who made prompt payments within 60 days of bill issuance. The Tribunal upheld this decision, emphasizing that the Assessing Officer did not consider the factual position asserted by the assessee. The Tribunal found that the assessee had submitted details of bills and discounts given, which were not denied or proven incorrect. Therefore, the Tribunal deemed the addition unjustified and ruled in favor of the assessee.

Issue 2: Disallowance of commission payment to 16 persons:

The second issue in the case concerned the disallowance of commission payments made to 16 persons by the Assessing Officer. The disallowance was based on the grounds that the assessee failed to establish the actual services rendered by the recipients of the commission. The CIT (A) agreed with this disallowance, stating that there was no evidence to suggest any special job undertaken to earn the commission. However, the Tribunal took a different stance and deleted the addition. The Tribunal noted that the assessee had agreements with the agents and had made actual payments, with TDS deductions and filings. The Tribunal highlighted that the assessee had submitted voluminous evidence, including ledger accounts, bills, and correspondence, explaining the nature of services provided by the agents. The Tribunal emphasized that revenue authorities cannot judge business decisions and held that the assessee had sufficiently established the services rendered for the commission payments. Therefore, the Tribunal set aside the lower authorities' orders and ruled in favor of the assessee.

In conclusion, the High Court dismissed the appeal filed by the Revenue, upholding the decisions of the CIT (A) and the Tribunal in favor of the assessee on both issues. The judgment highlighted the importance of considering factual positions and evidence submitted by the parties involved in tax disputes, emphasizing the need for revenue authorities to respect business decisions and practices within the legal framework.