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Facts
The case involved appeals for AY 2013-14 and 2015-16 concerning Indian Coal Agency. For AY 2015-16, the assessee appealed disallowance of advance rent and commission payments, while the Revenue filed a cross-appeal on various disallowances including Section 14A, which was dismissed due to low tax effect. For AY 2013-14, the assessee challenged a revisionary order by the Pr. CIT under Section 263, which directed re-assessment on issues of net profit, Section 14A disallowance, motor car depreciation, and excess commission payment.
Held
For AY 2015-16, the Revenue's appeal was dismissed due to low tax effect. The assessee's appeal on advance rent was allowed for statistical purposes, directing the AO to verify documents, while the disallowance of commission was upheld due to lack of proof of services rendered. For AY 2013-14, the assessee's appeal against the Section 263 revisionary order was partly allowed; the PCIT's findings of error regarding net profit, Section 14A disallowance (due to sufficient interest-free funds), and motor car depreciation were overturned, finding the AO's order not erroneous or prejudicial. However, the PCIT's finding of error regarding excess commission was upheld as the assessee did not press this issue.
Key Issues
Whether the Pr. CIT's revisionary order under Section 263 was justified on grounds of erroneous and prejudicial assessment. Whether advance rent paid by an assessee following cash system of accounting is an allowable business expenditure. Whether commission payments are deductible business expenditures in the absence of proven services. Maintainability of Revenue's appeal based on low tax effect.
Sections Cited
143(3), 263, 14A, 37(1), 143(2), 142(1), 144, 40(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: SONJOY SARMA & SRI RAKESH MISHRA
Date of concluding the hearing : February 19th, 2025 Date of pronouncing the order : May 20th, 2025 ORDER
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
The captioned appeal for A.Y. 2013-14 and cross appeals for A.Y. 2015-16 filed by the assessee and Revenue are against separate orders of the Pr. Commissioner of Income Tax, Kolkata-12, Kolkata [hereinafter referred to Ld. 'Pr. CIT'] for AY 2013-14 and Commissioner of Income Tax (Appeals)-10, Kolkata [hereinafter referred to as ld. 'CIT(A)'] for AY 2015-16. Since the assessee in both the appeals is common, the appeals were heard together and are being decided vide this common order for the sake of convenience and brevity 2. The assessee is in appeal before the Tribunal raising the following grounds of appeal: I. I.T.A. No.: 867/KOL/2018 Assessment Year: 2013-14:
1. That the learned CIT discussed what the terms "erroneous" and "prejudicial" means but did not discuss and was unable to prove how the instances provided by him have resulted in the assessment order passed by the ld. AO erroneous and prejudicial to the interests of the Revenue.
2. That the Appellant craves leave to add, amend, alter vary and / or withdraw any or all the above grounds of Appeal on or before the date of hearings.” The assessee has raised additional grounds of appeal for AY 2013- 2.1 14 as follows: “1. For that in view of the facts and in the circumstances, Ld. PCIT was wholly unjustified in passing direction to AO to consider the net profit as per Profit & Loss Account at Rs. 31,75,58,239/- instead of Rs. 28,58,02,415/- whereas the correct figure was only Rs. 28,58,02,415/- and the same also Page 2 of 28. Page 3 of 28. Page 4 of 28. Page 5 of 28. Page 7 of 28. Page 8 of 28. That the only departure made by section 13 of 1922 Act, from the tax legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income-tax Act, prima facie, the ITO has for the purpose of sections 10 and 12 of 1922 Act to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the ITO is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the ITO the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits. Among Indian businessmen, as elsewhere, there are current two principal systems of book-keeping. There is, firstly, the cash system in which a record is maintained of actual receipt and actual disbursements, entries being posted when money or money's worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment. For example, when goods are sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. There may have to be appropriate variations when this system is adopted by an assessee who carries, on a profession. Whereas under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, Page 9 of 28. Regular mode of accounting only determines the mode of computing taxable income and point of time at which the tax liability is attracted. It cannot be relied on to determine whether income has, in fact, resulted or materialised in the assessee's favour, nor can it affect the range of taxable income or the ambit of taxation.
6.3 Therefore, considering the totality of facts, since the assessee had followed cash system of accounting in which receipts as well as expenditure are accounted for on payment basis, the assessee had entered into agreement for payment of rent for guest house/transit accommodation which is an allowable business expenditure, the agreement was effective from 01.04.2013, the payment was made by cheque and the TDS as required was also made, hence the reasons for Page 10 of 28 Page 11 of 28 Page 12 of 28 Page 13 of 28 Therefore, as per the partnership deed, having regard to the rate of interest being low in comparison with other schemes, the continuing partners had agreed to pay commission at agreed % age on net profit of the firm after claiming all expenses but before allowing interest on capital to partners, to Miss Udita G. Koya one of the legal heirs of the said Mrs. Dhiraj G. Kova. The requirement of the funds was very necessary for the smooth running of the business of the firm. It is hereby submitted that the mother of Udita Koya was partner of the firm and was instrumental in the development of the business of the firm. She is looking after the financial affairs of the appellant Firm and had been rendering such services since long period of time. Hence as matter of goodwill of the business which was developed by the effort of her mother, the firm is paying Ms. Udita Koγα, 20% of the net profit since Financial Year 2001-02 (1.5% from Financial Year 1995-96 to 2000-01). After the demise of her mother, it is natural that Udita Kaya should have been a partner in the firm. However, in lieu of not taking her as partner, compensation in the form of commission of 2% of net profit and it has been agreed by the partners apart from the fact that she would look after the financial affairs of the firm. It is further submitted that the commission is being given to Udita Koya from Financial Year 1995-96 and the same has been allowed in scrutiny assessments of the firm in earlier years. It is further submitted that notwithstanding the above arguments and without prejudice to the above submission, even if it is withheld that the commission given to Udita Koya is not an allowable expenditure and the same is taxed in the hands of the appellant firm, it will be taxed @30%, hence there shall be no benefit to the revenue. This is because the commission as given by the Appellate firm is already being taxed in the hands of Udita Koya as commission Income @30%. Therefore, without prejudice to the above submission, the non disallowance of above expenditure is not detrimental to the interest of the Revenue.