1.11   Query:  

Accounting treatment of quantity discount and special rebates allowed by suppliers.

1. A retail trader of paints was allowed turnover discounts/product rebates for lifting of materials, depending on the volume of purchases made, by the suppliers, through issue of credit notes from time to time during a year. The said trader, consistently following the mixed accounting system, had credited these items to the purchases account as and when these were received from the suppliers. In the course of income-tax assessment of the said trader, the querist has stated, the assessing officer has opined that these items should have been directly credited to the profit and loss account and not credited to the purchase account, i.e., these should form part of the net profit only.

2. The querist has stated that para 4.8 of the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India, while explaining the term ‘sales/turnover’ specifically states that turnover discounts/special rebates can be adjusted against sales. In the view of the querist, sales and purchases are interrelated between the parties, therefore, the aforesaid recommendations should also hold good for purchases. However, the assessing officer is of the view that the guidelines of the Institute though binding on the members of the Institute, are not binding in nature to him and accordingly proposes to recast the trading account.

3. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)        Whether turnover discount/special rebate allowed by suppliers, as stated at para 1 above, can be credited to purchase account or these should be credited to profit and loss account.

(b)        Whether the Guidance Note issued by the Institute of Chartered Accountants of India is binding on the income-tax authorities.

                                                                   Opinion                            January 4, 1994

1. The Committee notes para 6.3 of Accounting Standard (AS) 2 on Valuation of Inventories, issued by the Institute of Chartered Accountants of India, which reads as follows:

“6.3     ‘Cost of Purchase’ consist of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase.”

2. The Committee further notes that the term ‘Trade Discount’ has been defined in the Guidance Note on Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India, as follows:

“A reduction granted by a supplier from the list price of goods or services on   business considerations other than for prompt payment.”

3. The Committee is of the view that the accounting treatment of discount and special rebates for lifting of material, depending on the volume of purchases made and allowed by the suppliers of goods, will depend on facts and circumstances of each case, particularly, the nature of such discount and rebates and prevalent commercial practices in this regard. Where the rebates are of the nature of trade discount, e.g., bulk discount which is allowed either expressly through an agreement or through prevalent commercial practices in the terms of trade, these should be adjusted in arriving at the cost of purchases. In other words, the rebate for prompt payment, e.g., case discount, should not be treated as adjustment to the cost of purchase. Such rebates should be treated as separate revenue items and accounted for accordingly.

4. The Committee notes that the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, is an apex body of professional accountants in the country, the Council of the Institute issues accounting standards, guidance notes etc. on various accounting, auditing and allied matters for the guidance of and compliance by its members. These pronouncements of the Institute are considered authoritative document in the country, and insofar as the matters pertaining to accounting and auditing are concerned, these are, generally relied upon by various governmental authorities and courts.

5. On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 3 of the query:

(a)        Kindly refer to para 3 above.

(b)        Kindly refer to para 4 above.

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