Commission on retained passenger service fee and consistent accounting methods control tax deduction and income recognition issues.

Retention of 2.5% of passenger service fee invoice value by airlines was treated as commission within the meaning of section 194H, so the proviso to section 40(a)(ia) required verification whether tax had been deducted and paid on the retained amount; the remand for that factual examination was held appropriate. The court also stated that a company cannot follow a hybrid accounting method by recognising expenditure on a mercantile basis while deferring related income to a later year on receipt basis, and the same-year matching principle must be maintained to avoid double taxation. The connected section 14A challenge was treated as academic.

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Issues: (i) Whether the Tribunal was justified in restoring the disallowance issue relating to collection charges retained by airlines under section 40(a)(ia) in respect of PSF when the amount retained was treated as commission under section 194H; (ii) Whether the Tribunal was justified in holding that the Revenue's challenge to the disallowance under section 14A was covered and that the accounting treatment adopted by the assessee could not sustain a hybrid method within the relevant year.

Issue (i): Whether the Tribunal was justified in restoring the disallowance issue relating to collection charges retained by airlines under section 40(a)(ia) in respect of PSF when the amount retained by airlines was treated as commission under section 194H.

Analysis: The retained 2.5% of the invoice value was held to bear the character of commission within the meaning of section 194H. The assessee's contention that PSF security component was held in fiduciary capacity and therefore not taxable did not negate the statutory obligation to examine whether the airlines had deducted and paid tax on the retained amount. The Tribunal's remand for verification of the factual position under the proviso to section 40(a)(ia) was found to be appropriate.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the Tribunal was justified in holding that the Revenue's challenge to the disallowance under section 14A was covered and that the accounting treatment adopted by the assessee could not sustain a hybrid method within the relevant year.

Analysis: The Court held that a company cannot adopt a hybrid method by following mercantile accounting for expenditure while deferring corresponding income to a later year on receipt basis. The expenditure and income had to be matched consistently under the settled accounting principles, and the amount brought to tax in one year was directed to be excluded in the later year to avoid double taxation. The Revenue's connected challenge under section 14A was treated as academic in view of the disposition of the connected appeals.

Conclusion: The issue was answered in favour of the Revenue on the accounting-method question and the connected challenge under section 14A was rendered academic.

Final Conclusion: The appeals were disposed of with the principal issue on retained collection charges decided against the assessee, while the accounting-method issue was decided in favour of the Revenue and the related exempt-income issue was left academic.

Ratio Decidendi: Retention of a percentage of PSF by airlines could constitute commission attracting tax-deduction obligations, and a taxpayer cannot maintain a hybrid accounting approach within the same assessment year by mixing mercantile and cash methods for corresponding income and expenditure recognition.

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