2023 (6) TMI 1208 - AT - Income Tax

Tribunal decision: Assessing Officer's additions deleted due to lack of comparable data and details

The Dy. C.I.T. Circle – 1 (1) New Delhi Versus AIS Distribution Services Ltd

The Tribunal upheld the deletion of additions made by the Assessing Officer on account of difference in Gross Profit Rate, Scheme Expenses, and overriding ... Addition on account of difference in Gross Profit Rate - method of accounting - AO noticed that the assessee company, in its trading account, is showing gross sales including trade discount as total sales which are, in fact, not being credited into its books of accounts - HELD THAT:- GP rate adopted by the AO for A.Y 2010-11 is not comparable with the GP rate of A.Y 2011-12 and 2012-13 under the consideration because the sales is a predominant determinative factor and the same is not comparable as the assessee has accounted the sale at DLP during the A.Y 2010-11 as against the accounting of turnover at MRP during the year under consideration. Sale is prime component to determine the GP ratio and if the sale factor is not comparable, resulting GP cannot be considered comparable. On totality of facts, we do not find any reason to interfere with the findings of the ld. CIT(A). The common grounds relating to GP addition in A.Y 2011-12 and 2012-13 are dismissed. Addition on account of Scheme Expenses - as per AO though the assessee has given details of scheme but not furnished details of beneficiaries to whom these gift items were distributed - whether the expenses have been incurred for the purpose of the business and is not of capital in nature? - HELD THAT:- As there is no dispute that the expenses were incurred for the purpose of business and were not of capital expenditure, the same has to be allowed. But, at the same time, the quantum can be questioned for want of supporting evidences as the same were not justified by production of books of account. Therefore, in the interest of justice and fair play, we deem it fit to restrict the disallowance to 10% of the expenditure claimed under this head. Thus direct the AO to restrict the disallowance. Addition of overriding commission - justification of claim of expenditure and explain the basis of payment asked - as per AO justification for payment given by the assessee is too general and no specific information has been given justifying payment - CIT-A deleted the addition - HELD THAT:- It is true that in A.Y 2010-11 also, similar disallowance has been made and it is equally true that while making the disallowance for A.Y 2011-12, the AO has simply followed the findings given in A.Y 2010-11. Since in A.Y 2010-11 addition was deleted by the ld. CIT(A) and though the revenue was in appeal before this Tribunal but deletion of this addition was not challenged. Therefore, the same has attained finality. Finding parity of facts, we do not find any error or infirmity in the deletion made by the ld. CIT(A). Deletion stands confirmed. ISSUES PRESENTED AND CONSIDERED 1. Whether trade discount, shown by the assessee as Selling & Distribution Expense rather than deducted from sales in the trading account, must be treated as part of the trading account for computation of gross profit rate and whether recasting trading account and applying an alternative GP rate for determination of taxable income was justified. 2. Whether expenditures claimed as 'Scheme Expenses' qualify as allowable business deductions under section 37 (revenue, not capital) where supporting party-wise records and books were not produced, and if disallowance is warranted in whole or in part for want of evidence. 3. Whether overriding commission payments (significantly higher in the year under assessment than in preceding year) are deductible business expenses where similar disallowance was earlier deleted and that deletion has become final - i.e., application of the rule of consistency and finality of prior deletion. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatment of Trade Discount and Recasting of Trading Account for GP Determination Legal framework: The determination of taxable income requires correct accounting treatment of items that affect gross profit; trade discounts that directly reduce selling price ordinarily relate to sales and, in accountancy principles, are reflected in the trading account by reducing sales, thereby affecting gross profit computation. Precedent treatment: The authorities below differed on comparability of GP ratios across years depending on invoicing method (MRP vs DLP); no new legal precedent was overruled. The Tribunal followed the principle that comparability for GP benchmarking requires similarity in sales accounting methods. Interpretation and reasoning: The Assessing Officer recast the trading account by treating trade discount as a trading item (deducted from sales) and applied a GP rate derived from an earlier year to compute additions. The assessee explained a change in billing method - invoices shifted from Dealer List Price (DLP) to Maximum Retail Price (MRP) accounting - altering sales recognition and making the earlier year's GP non-comparable. The Commissioner (Appeals) accepted the assessee's adjusted GP comparison chart and the remand clarification for the earlier year which showed the AO's adopted GP was incorrect. The Tribunal emphasized that sales composition and method of accounting sales are the dominant determinants of GP ratio; where sales accounting is not comparable across years (DLP vs MRP), the resultant GP ratios are not comparable and cannot be legitimately benchmarked to make additions. Ratio vs. Obiter: Ratio: Where the basis of sale recognition differs materially between years (e.g., DLP vs MRP invoicing), GP ratios are not comparable; AO cannot recast trading account and apply an earlier year GP rate as a benchmark absent comparability. Obiter: Observations on general accountancy principles regarding treatment of trade discount as sales-related expense reinforce the ratio but were not treated as overriding law changing prior jurisprudence. Conclusions: The Tribunal declined to interfere with the deletion of additions made by the Commissioner (Appeals), holding the AO's GP rate for the benchmark year was not comparable and that sales accounting method (prime determinant of GP) rendered the AO's recasting and additions unsustainable. Grounds challenging deletion of GP additions for the relevant assessment years were dismissed. Issue 2 - Allowability of Scheme Expenses under Section 37 where Books/Party Details Not Produced Legal framework: Section 37 principles: expenditure is deductible if incurred wholly and exclusively for the purpose of business and is revenue in nature (not capital). The revenue's role is limited to verifying nexus and nature; it cannot substitute its judgment for business decisions on reasonableness in the absence of evidence of non-business purpose or capital nature. Precedent treatment: The Tribunal accepted the appellate authority's reliance on section 37 principles that nexus to business suffices for allowability; no authority was overruled. The decision recognized that quantum may be challenged for want of evidentiary support. Interpretation and reasoning: The AO disallowed scheme expenses entirely because the assessee did not furnish party-wise beneficiary details and the AO considered the existence of other discounts/commissions made gifts unjustified. The Commissioner (Appeals) held once nexus to business is established, the revenue cannot act as a board of directors to assess reasonableness of expenditure and directed deletion. The Tribunal acknowledged that while nexus and revenue nature were not disputed, absence of supporting books and particulars justified scrutiny of quantum. Balancing fairness and probative deficiency, the Tribunal restricted disallowance to a specified percentage (10%) of scheme expenses, quantifying disallowance amounts for the years, thereby partially allowing the appeals. Ratio vs. Obiter: Ratio: Expenditure established as incurred for business and being revenue in nature must be allowed under section 37; however, where supporting evidence to establish quantum is lacking, the revenue may limit or quantify disallowance proportionately. Obiter: The Tribunal's choice of a 10% limitation is a fact-sensitive equitable adjustment rather than a fixed legal standard to be universally applied. Conclusions: The Tribunal upheld that scheme expenses are deductible as business expenses (not capital) but, due to lack of books/particulars, reduced the claim by a specified quantified disallowance (10% of the claimed amount), directing AO to restrict disallowance to the determined sums for each assessment year. The ground was partly allowed. Issue 3 - Deductibility of Overriding Commission and Finality/Rule of Consistency Legal framework: Deductibility of commission payments requires demonstration of business nexus and genuine transaction. Separately, the principle of finality and consistency applies where a like addition was deleted earlier and the revenue did not appeal that deletion to contest its validity for subsequent years. Precedent treatment: The Commissioner (Appeals) relied on an earlier deletion and an external High Court decision (cited by the assessee) to delete the addition; the Tribunal recognized settled taxation practice that deletion not appealed by revenue attains finality and can inform treatment in subsequent comparable years. No precedential overruling occurred. Interpretation and reasoning: The AO disallowed overriding commission because of increase over the preceding year and perceived insufficiency of particulars. The assessee pointed to an identical disallowance deleted in the prior year; the revenue did not appeal that deletion, rendering it final. The Tribunal found parity of facts between years; since the prior deletion had become final, the same treatment was appropriate for the assessment year under consideration. The Tribunal applied the rule of consistency and finality to confirm deletion. Ratio vs. Obiter: Ratio: Where a like disallowance has been deleted in a prior year and the revenue has not challenged that deletion, the deletion attains finality and, in the presence of factual parity, the same deletion should be applied in subsequent years. Obiter: Observations about the sufficiency of the assessee's contemporaneous explanations and comparative charts were ancillary to the principal finding on finality. Conclusions: The Tribunal confirmed deletion of the overriding commission addition for the assessment year, dismissing the revenue ground. The Tribunal recognized the prior deletion as final and applied consistency to reach its conclusion. Inter-issue cross-references and dispositive result All three appeals raised common issues on GP computation and scheme expenses; the Tribunal upheld the Commissioner (Appeals)'s deletion of GP additions for lack of comparability (Issue 1), partly allowed scheme expenses with a quantified limited disallowance for evidentiary deficiency (Issue 2), and confirmed deletion of overriding commission on principle of finality and consistency (Issue 3). Overall, the revenue appeals were partly allowed in result.