Discounts and Incentives are not Unexplainable Cash Credits

"Discounts and incentives" are normal in a business scenario and sometimes may take substantial proportions. However, the allegation that such "Discounts and incentives" was unexplainable "cash credits" was turned down by the ITAT Chennai in the case of THE ASSISTANT COMMISSIONER OF INCOME TAX Vs M/s MANGAL & MANGAL [2023-VIL-1278-ITAT-CHE]. Section 68 of ITA'61 [Sec 102 of ITA'25] requires the taxation of Cash Credits where the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not found satisfactory. The rate of tax is the higher rate u/s 115BBE [Sec 195 of ITA'25]. 

However, in case, any income is assessed under any head of income as per provisions of section 14 of ITA'61 [Sec 13 of ITA'25], then the question of application of provisions of section 115BBE of the Act, does not arise.

Where a taxpayer is maintaining books of accounts, has also credited the relevant income in the books of accounts as 'discounts and incentives', explained nature and source of the said sum and offered the same to tax as income under the head profit and gains of business, then in the absence of any cogent reason to believe the contrary, such incomes cannot be treated as 'cash credits' u/s 68 of The Income Tax Act.

Unexplained cash credits u/s. 68 - taxability u/s 115BBE - amount offered under the caption "Incentives and Discounts" relating to cash deposits made in the bank account - on analysis of financial results, including purchase and sale and also stock position before demonetization and after demonetization, the AO came to the conclusion that the assessee has suppressed turnover and whatever unaccounted income earned from said turnover has been brought into books as income from discounts and incentives

As per CIT(A), it is assessable under the head income from business and profession -

HELD THAT: As clearly admitted by the Assessing Officer in the assessment order, the appellant had disclosed income from discounts and incentives for the last two assessment years and the Department has accepted the claim of the assessee. Further, the disclosure made by the appellant is taken support from the conclusion drawn by the AO in light of analysis of purchase and sales turnover for last five years, where the AO had recorded categorical finding that after demonetization, the sales turnover of the assessee has been increased by more than 100%.

AO further concluded that the assessee has routinely suppressed its turnover and generated unaccounted cash over the period and the same has been brought into books in the form of discounts and incentives. Therefore, from the reasons given by the AO, it is abundantly clear that the income disclosed under the head discounts and incentives is inextricably linked to the business activity of the appellant.

Therefore, once the nature and source of credit found in the books of accounts of the assessee is linked to business, then any income generated out of such business activity is assessable under the head income from business and profession alone, but not under the provisions of section 68 of the Act. The ld. CIT(A), after considering relevant facts has rightly held that income declared by the appellant towards discounts and incentives is assessable under the head income from business and profession, but not u/s. 68 of the Act.

Application of provisions of section 115BBE - In the present case, since the assessee has declared income under the head profit and gains of the business, and further the same has been held so, the question of application of higher rate of tax under provisions of section 115BBE of the Act, does not arise. The ld. CIT(A), after considering relevant facts, has rightly directed the Assessing Officer to compute tax in respect of income declared under the head profit and gains of business towards discounts and incentives, under normal rate of tax applicable to firms. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject grounds of appeal taken by the revenue.

Enhanced rate of tax - application of provisions of Section 115BBE of the Act, in light of amendment to Section 115BBE of the Act by the Taxation Laws (Second Amendment) Bill, 2016 - We find that, although the Ld. Counsel for the assessee and the ld. DR present for the revenue has argued the issue of applicability of enhanced rate of tax by the Taxation Law (Second Amendment) Bill, 2016 which has received assent of the President on 15.12.2016, but fact remains that income declared by the appellant towards discounts and incentives under the head income from business and profession has been held to be assessable under the head income from profit and gains of business, the question of adjudication of legal ground taken by the appellant and argued by the ld. DR becomes infructuous in nature and thus, the same is therefore not taken up for adjudication. But, we left open the issue for adjudication at appropriate times, if issue arises for consideration.

Appeal filed by the revenue is dismissed.

No. ITA No.: 772/Chny/2022 
Dated. September 6, 2023

Citations: 1. MARUTHI BABU RAO JADAV Versus THE ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE I - 2021 (1) TMI 481 - KERALA HIGH COURT