Case Law Details

Case Name : ACIT Vs Rukmani Iyer (ITAT Mumbai)
Appeal Number : ITA No. 6242/Mum/2012
Date of Judgement/Order : 28/10/2015
Related Assessment Year : 2009-10
Courts : All ITAT (7310) ITAT Mumbai (2108)

Brief of the case:

In the case of ACIT Vs. Rukamani Iyer Mumbai Bench of ITAT held that the claim has to be judged in the light of commercial expediency. Relying upon the judgment of CIT v Associated Electrical Agencies {2004} 266 ITR 63 (Mad.) it was held that as such if the payment is made out of commercial expediency, despite there was no legal compulsion, the same is allowable.

Facts of the case:

  • Assessee is the proprietor of M/s. P. P. International, which is a merchant exporter of pharmaceutical products.
  • AO noticed that the assessee had debited an amount of Rs.94,05,029/- towards commission on sales, and that the entire amount had been paid to person residing outside India.
  • AO again noticed that there was difference between the balance of sundry creditors (two parties) as per the amount shown in the books of accounts and as per the confirmation received from the said three parties.
  • During the course of assessment proceedings the AO issued notice to two parties and In absence of response from these two creditors, it was presumed that this is a case of ceased liability and accordingly the closing balance of these two parties was added as income.

Contention of the assessee:

  • Payments were actually in the form of discounts which would be provided as and when payments would be received from parties to whom sales have been made by the assessee, and that the same was a kind of provision for discount, kept in the form of commission.
  • The amount has not been paid by the parties till date.
  • The assessee had offered a trade discount on sales to the above referred parties, and booked the entire sales in profit & loss a/c to show higher sales to the bank for obtaining loan from them.
  • The assessee is consistently following the mercantile system of accounting and the liability existing at the year end, has been properly booked as expenditure.
  • Assessee relied upon CIT v Associated Electrical Agencies {2004} 266 ITR 63 (Mad) where it was held that the claim has to be judged in the light of commercial expediency. As such if the payment is made out of commercial expediency, despite there was no legal compulsion, the same is allowable.
  • In the AY 2008-09 also the AO has disallowed the Commission/Discount on Sales stating the similar grounds/reasons which your goodself has allowed.
  • The sundry creditors were genuine, which shall be evident from the notices issued by the department and response received from these parties. Payment was made through a/c payee cheques.
  • The bank statements were made available to AO and no discrepancies were pointed out therein by the AO.
  • The purchases from these suppliers were also shown in the VAT return filed by the assessee, their corresponding sales were also shown in the VAT return and VAT Audit Report.
  • Assessee had opened two ledger accounts in the books of accounts, one showing debit balance and other showing credit balance which were not examined by the AO.

Contention of the revenue:

  • Assessee did not submit any proof for having transferred the amount.
  • Since no justification has been submitted till the date of passing of the assessment order, therefore, assessee’s claim of commission on sales to the tune of Rs.94,05,029/- was not allowable.

Held by CIT (A):

  • The amount of was an ascertained liability and was accordingly allowable to the assessee in view of the accrual method of accounting, consistently followed by the assessee.
  • Where facts and situation remaining the same, there were no reasons to differ with earlier orders.
  • The AO could have issued show cause notice before making the addition or asked for the additional proof in writing which he failed to do so.
  • The claim of tile assessee was justified, particularly when assessee’s business is 100% exports and all purchases were made as per specification of export order. The purchases and sales quantities were duly reconciled.
  • All sales were duly supported by custom clearance and bill of ladings, and payment to parties were made by account payee cheques. Under these circumstances, the question of unexplained creditors could not arise.
  • Liabilities with respect to two creditors cannot be presumed to have ceased. The assessee has continued to acknowledge these liabilities in its books of accounts. These parties have also not denied existence of transactions with the assessee.
  • Reliance was placed on judgment of Hon’ble Punjab and Harayana High Court in the case of Sita Devei Juneja 325 ITR 593 where it was held It was for the Assessing Officer to show that the liabilities in question had ceased to exist. In fact, these liabilities were payable by the assessee and unless demonstrated, they were to be shown as outstanding. These liabilities were appearing in the assessee’s balance- sheet, indicating acknowledgment of the debts payable by the assessee.

Held by ITAT:

  • The issue of commission on sale was decided in assessee’s favour in earlier years so there is no need to interfere with the order of CIT (A).
  • The assessee has discharged its primary onus by submitting requisite evidences. But Ld. AO made half cooked inquiries only and did not exercise his powers available under the law to clear his doubts.
  • Keeping in view the facts and circumstances of the case, as well as the judicial pronouncements, the CIT(A) agreed with the explanation of assessee in respect of reconciliation of balance with these three creditors and directed the AO to delete addition. Order of the CIT (A) is confirmed.
  • CIT (A) has rightly held that Liabilities with respect to two creditors cannot be presumed to have ceased.
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