Tax Planning: Commission income /or Regular business income

1. Section 68 is applicable in the case of Cash Credits only  (deposits in the assessee's books)

2. Whether A is charging his(their own) profit(s)  on the purchases made by them from B or not.-Please clarify. 

3. If the transactions of sales and purchases are made by A at same price i.e. without any margin- but commission is being received in consideration, is sufficient for A to show their business motive. 

4. B should raise credit note for commission and deduct tax. 

13-12-2010.

Sir!

Thanks for your reply.

This is to clarify that 'A' is receuving only commission on the quatity billed for letting his VAT no. t be used by 'B'.

The purchase & sales is same . 'A' will receive only commsion income.

My main question is if we show the purchae & sale figure as same, show the net commission income in the bboks of 'A', whether Section 44AB will be applicabe in case of 'A'

It is natural that since the Sale & purchase is done in 'A' name, it is deemed that he is carryig on business.

Vice Versa , if 'B' shows in his biiks the commisison paid ny 'A' as his expenses, then 'B' has to explain the nature of payment to 'A'.

Once it is disclosed that 'B' is using 'A' VAT no. to carry on business & for that commission is paid.

In this case , the Sale/ purchase of 'A'  may be clubbed wit 'B'

Kindly clarify if my thinking / direction is wrong.

CA Laxmi Mittal

B can give the amount as Trade Discount to A .

You may explain that since as per our agreement A can not charge more from their respective customers, we are compensating  A by providing trade discounts to them.

The department may consider such trade discounts in the nature of commission that's why it is safer to deduct TDS on such trade discounts to your agents i.e. A.

A will be liable for Tax Audit.

It should not be told that B is giving commission to A for the use of their Vat Nos.

15-12-2010

Kind attn. Mr. Bafna-CA,

Can you be more specific pl.

As I understood, there will be a agreement between 'A' & 'B' for not charging more price/ rate for Sale  vis a vis purchases.

For that B is giving Trade discount/ Commission in crude language @ --Rs. per tonnage of billing. In that case , only Trade discount received by A will be A's Gross income / G.P.

After claiming indirect expenses, A can declare Net taxable income from business.

A will have to undergo Tax Audit.

B can claim as Trade discount as his expenses.

But if I.T. questions, where is the Profit gone out of Total Turnover made by A, then it can add the assumed margin of profit either in A or B's income.....????

Request clarifying.

CA Laxmi Mittal

If you really want to show Gross Profit in the Trading A/c  of  A , 

Credit Trading A/c by The Discount & Commission A/c.

This Trade Discount should be of the cadre of GP required to be shown by A. 

System Adopted by B and  purpose for which it is being adopted is having flaw in itself .   We have just discussed to minimise the risk.

As A is raising its own bills as an agent against purchases from the Principal,  he may get  his accounts audited U/s 44AB on turnover criteria and can show directly Commission as his Gross Income .

16-12-2010

Kind Attn. Mr. Bafna-C.A.

Thanks for your mail.

The word used by you as ''This Trade Discount should be of the cadre of GP required to be shown by  A'

pl. clarify that as Sale & purchase is in fact is made by 'B' using 'A' 's VAT no. , is G.P. should be equivalent to the G.P. based on Sale normally accepted by I.T.

In such case , even if commission works out to be less then the above standard, then 'A' will resort to book normal expenses in order to dericve N.P. on which Tax is paybale . It should commensurate/lessor then  the commission received .

Apparently 'A' will show as if his source income as  commission in ITR-4, at the same time not involving anywhere 'B' 's name.

In above case 'B' will also/ should  not claim Trade discount/ commission as expenses to maintain of not having any hand in handling 'A' 's transactions.???/?

Am I wrong Sir! in my above interpretation ?/? If so pl correct me pl.

Regards!

CA Laxmi Mittal