ETA General Private Limited, CHENNAI v. ACIT, CHENNAI

CO 63/CHNY/2016 | 2011-2012
Pronouncement Date: 05-10-2016

Appeal Details

RSA Number 6321723 RSA 2016
Assessee PAN AAACE6650P
Bench Chennai
Appeal Number CO 63/CHNY/2016
Duration Of Justice 5 month(s) 8 day(s)
Appellant ETA General Private Limited, CHENNAI
Respondent ACIT, CHENNAI
Appeal Type Cross Objection
Pronouncement Date 05-10-2016
Appeal Filed By Assessee
Bench Allotted A
Assessment Year 2011-2012
Appeal Filed On 27-04-2016
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . !' BEFORE SHRI CHANDRA POOJARI ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR JUDICIAL MEMBER I.T.A.NOS. 469 470 471 472 473 & 474/MDS./2016 ASSESSMENT YEARS: 2009-10 2012-13 2008-09 2009-1 0 2010-11 & 2011-12 & C.O. NOS.58 59 60 61 62 & 63/MDS./2016 DEPUTY COMMISSIONER OF INCOME TAX CORPORATE CIRCLE-2(1) CHENNAI 600 034. VS. M/S. ETA STAR APPLIANCES PVT LTD. 71 STERLING ROAD CHENNAI 600 034. [PAN AAACE 6650 P ] ( #$ / APPELLANT) ( %&#$ /RESPONDENT/ CROSS OBJECTOR) / APPELLANT BY : MR.SHIVA SRINIVAS JCIT D.R /RESPONDENT BY : MR.G.BASKAR ADVOCATE / DATE OF HEARING : 06 - 0 9 - 201 6 / DATE OF PRONOUNCEMENT : 05 - 10 - 2016 ' / O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER THESE FOUR APPEALS OF THE REVENUE ARE DIRECTED A GAINST THE DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-6 CHENNAI DATED 23.12.2015 AND CORRESPONDINGLY THE A SSESSEE FLED A CROSS OBJECTIONS IN SUPPORT OF THE ORDER OF LD.CIT( A). SINCE ISSUES ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 2 -: INVOLVED IN ALL THESE REVENUES APPEALS AS WELL AS ASSESSEES CORRESPONDING CROSS OBJECTIONS ARE COMMON IN NATURE THESE APPEALS & C.OS ARE CLUBBED TOGETHER HEARD TOGETHER DISPOS ED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FIRST COMMON GROUND IN REVENUES APPEAL IN ITA NOS.469 470 471 472 & 474/MDS./16 IS WITH REGARD TO DELETION OF ADDITION TOWARDS SERVICE COMMISSION YET TO BE PAID TO THE DEALERS WHICH IS ONLY A PROVISION. 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE CL AIMED SERVICE COMMISSION IN THESE ASSESSMENT YEARS AS THE EXPENDI TURE WHEN THE AIR CONDITIONERS WERE SOLD TO THE DEALERS. ACCORDI NG TO AO THE EXPENDITURE WHICH IS BOOKED AT THE TIME OF SALE IS ONLY A PROVISIONAL EXPENDITURE. THE ACTUAL EXPENDITURE WILL ACCRUE O NLY WHEN THE PARTICULAR UNIT IS SOLD BY THE DEALER AND INSTALLED AT THE CUSTOMERS PREMISES. THERE IS NO CERTAINTY THAT ALL THE UNITS SOLD TO THE DEALER WOULD IN TURN BE SOLD TO THE CUSTOMER WITHIN THE SA ME YEAR. THEREFORE ONLY THE TOTAL EXPENDITURE INCURRED ON THE ISSUE OF CREDIT NOTES TO THE DEALERS AT THE TIME OF SELLING BY THE DEALER TO THE CUSTOMER IS ALLOWABLE FOR DEDUCTION. IN THIS CASE THE PROVISION SO CREA TED DURING THE YEAR WAS DISALLOWED BY THE AO. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 3 -: 3.1 ON APPEAL THE LD.CIT(A) ALLOWED THE CLAIM OF ASSESSEE WITH THE FOLLOWING OBSERVATIONS. (A) THE LIABILITY IS CREATED OUT OF THE EVENT OF S ALE. IN THE CASE OF THE ASSESSEE COMPANY SALE IS THE OBLIGATING EVE NT. THE EVENT OF SALE HAS CREATED THE PRESENT OBLIGATION OF SERVICE COMMISSION FOR THE ASSESSEE COMPANY. (B) AS CAN BE NOTED FROM THE NARRATION OF FACTS IN THE PRESENT CASE THE OBLIGATING EVENTS I.E THE SALE CREATES A LIABIL ITY THAT INVOLVES OUTFLOW OF RESOURCES. (C) THE ASSESSEE COMPANY HAS A DEFINITE POLICY FOR ESTIMATING THE OBLIGATION THAT GOES INTO THE CREATION OF THE PROVI SION. THE PROVISION AS WE HAVE SEEN IN THE SCHEME OF ACCOUNT ING ENTRIES BY THE ASSESSEE COMPANY IS CREATED UNDER THE MATCHI NG CONCEPT AT THE TIME OF SALE. THE LIABILITY IS PREFI XED AND EMBEDDED IN THE SALE AMOUNT. DIFFERENT ORDERS OF AI R CONDITIONERS SOLD BY THE ASSESSEE COMPANY BRING IN DIFFERENT PRE FIXED LIABILITY. TO NOTE A SAMPLE FEW INSTANCE S FROM THE PRICING POLICY OF THE COMPANY THE ELEMENT OF SERVI CE COMMISSION EMBEDDED IN THE SALE IS AS UNDER: (D) THE PROVISION IS CREATED ONLY ON THE EVENT OF SALE AND IN A PREDETERMINED MANNER AS ORDAINED BY THE PRICING POL ICY OF THE ASSESSEE COMPANY. HENCE IT CAN BE SAID THE ESTIMAT ION OF THE PROVISION IS SCIENTIFIC AND RELIABLE. MODEL MRP SERVICE COMMISSION AKG9G 17 940 400 AXZ18GPN 26 490 600 ASG18 42 990 800 AWG24 49 990 800 ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 4 -: (E) THE ASSESSEE COMPANY UNDERTAKES A REVIEW OF THE AMOUNTS OUTSTANDING IN THE PROVISION AT EACH BALANCE SHEET DATE AND AS PER ITS POLICY WRITES BACK THE AMOUNT OUTSTANDING IN THE PROVISION ACCOUNT FOR THREE YEARS AS INCOME. (F) ON PERUSAL OF THE SERVICE COMMISSION ACCOUNT OF THE ASSESSEE COMPANY IT IS OBSERVED THAT LIABILITY CREATED UNDE R THE MATCHING CONCEPT IS CONTINUOUSLY BEING DISCHARGED B Y ISSUANCE OF CREDIT NOTES TO THE DEALERS AS PER THE ACCOUNTIN G TREATMENT NARRATED SUPRA. THE CREDIT NOTES PASSED ON THE DEAL ERS PER THE NARRATION AVAILABLE IN THE SERVICE COMMISSION. AGAINST THE ORDER OF LD.CIT(A) THE REVENUE IS IN A PPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.D.R IS THAT THE SERVICE COMMISSION IS ONLY A PROVISION MADE IN THE BOOKS OF ACCOUNTS AND IT WAS NOT ACTUALLY INCURRED. ON THE OTHER HAND LD.A. R SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING THE SAME SYSTEM OF BOOK KEEPING CONSISTENTLY FROM YEAR TO YEAR AND THIS SALES COMMI SSION EMBEDDED TO THE SALES. WHENEVER ASSESSEE MAKES THE SALES CORRES PONDING LIABILITY ATTACHED TO THE ASSESSEE TO MAINTAIN AIR CONDITIONE RS IN A BETTER CONDITION OF OPERATIONS FOR A PARTICULAR PERIOD AND FOR WHICH THE ASSESSEE IS PROVIDING FREE MAINTENANCE WARRANTY WH ICH INVOLVES THE COST TO BE BORNE BY THE ASSESSEE FOR WHICH THE ASSE SSEE IS MAKING THE PROVISION IN THE BOOKS OF ACCOUNT OF ASSESSEE. FURT HER HE SUBMITTED ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 5 -: THAT WHEN THE ASSESSEE RECOGNIZED THE INCOME ON THE SALE OF THE AIR CONDITIONERS AT THE SAME TIME ON PROVISIONAL BASIS PROVISION TOWARDS SERVICES CREATED BY THE ASSESSEE. ACCORDING TO HIM THE DEPARTMENT CANNOT DISTURB THE CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. IN OUR OPINION IF THE SERVICE COMMISSION IS DIRECTLY ATTACHED TO SALES MADE BY THE ASSESSEE AND AS SOON AS SALES ARE ACCOUNTED CORRESPONDING SERVICE CHARGES/COMMISSION TO BE INCU RRED BY THE ASSESSEE TO BE BOOKED IN THE BOOKS OF ACCOUNT OF AS SESSEE. ACCORDINGLY WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF AO TO VERIFY THE BOOKS OF ACCOUNTS OF ASSESSEE WHETHER TH E SERVICE COMMISSION IS DEBITED WHEN THE SALES MADE AND IF TH E ASSESSEE CHARGES SERVICE COMMISSION AS SOON AS THE SALES IS MADE THE CLAIM OF ASSESSEE IS TO BE ALLOWED AS IT IS RELATED TO THE SALES OF AIR CONDITIONERS. WITH THIS OBSERVATION WE REMIT THE I SSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. 5. THE NEXT GROUND IN REVENUES APPEAL IN ITA NOS. 470/MDS./16 IS WITH REGARD TO DELETION OF DISALLOWANCE U/S.14A OF THE ACT 6. THE FACTS OF THE CASE ARE THAT DURING THE COURS E OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HOLDS INVESTMENTS OF RS.8 71 81 818/- IN EQUITY SHARES WHICH ARE CAPABLE OF GENERATING TAX FREE INCOME. THEREFORE THE PROVISIONS OF 14A ARE ATTRACT ED AND THESE ARE WORKED OUT AS PER THE PROVISIONS OF RULE 8D. THE AR DURING THE COURSE OF HEARING ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 6 -: STATED THAT THESE ARE OLD INVESTMENTS AND PROVISION S U/S 14A ARE NOT ATTRACTED AND THAT NO EXPENDITURE HAD BEEN INCURRED ON THE INVESTMENT. MOREOVER THE VERY FACT THAT THERE ARE INVESTMENTS W OULD NECESSARILY ENTAIL SOME SORT OF CONTROL AND SUPERVISION WHICH IN TURN WOULD MEAN INCURRING OF EXPENDITURE DUE TO DIVERSION OF EXISTING RESOURCES TO THIS END. HENCE THE PROVISIONS OF SEC.14A R.W.R. 8D ARE CLEARLY ATTRACT ED IN THIS CASE. SECTION 14A(3) SPECIFICALLY STATES THAT THE PROVISIONS WOUL D APPLY EVEN IF THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED. A S PER THE PROVISIONS OF SECTION 14A OF THE ACT ANY SUM INCURRED FOR EARNIN G AN INCOME EXEMPT FROM TAX CANNOT BE ALLOWED AS EXPENDITURE IN COMPUTING T HE TAXABLE INCOME. IT ESSENTIALLY MEANS THAT THE EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE COMPANY ARE TO BE DIVIDED INTO TWO CAT EGORIES VIZ. ONE RELATING TO THE EXEMPT STREAM OF INCOME AND THE OTHER RELATI NG TO THE TAXABLE STREAM OF INCOME. THE EXPENSES RELATING TO THE EXEMPT STRE AM OF INCOME CANNOT BE CLAIMED AGAINST THE TAXABLE STREAM OF INCOME. IT IS NOT NECESSARY THAT THERE SHOULD BE ANY INCOME EARNED DURING THE YEAR. THE EX PENDITURE INCURRED FOR EARNING AN INCOME CAN BE LESSER THAN THE INCOME ITS ELF. ON SOME OCCASIONS THERE COULD NOT EVEN BE ANY INCOME THOUGH EXPENSES ARE INCURRED TOWARDS EARNING THE SAME. EVEN IN SUCH CIRCUMSTANCES THE P ROVISIONS OF SECTION 14A READ WITH RULE 8D WERE HELD TO BE APPLICABLE RELYIN G ON THE JUDGEMENT OF THE SPECIAL BENCH OF ITAT DELHI IN M/S. CHEMINVEST LIM ITED VS. DCIT (ITA 2048/DEL/2005) AND BY ITAT CHENNAI AND COMPUTED TH E DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D OF I.T RULES. ACCOR DINGLY THE AO DISALLOWED ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 7 -: AN AMOUNT OF ` 25 69 031/-. AGGRIEVED THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 6.1 ON APPEAL THE LD.CIT(A) OBSERVED THAT PLACIN G RELIANCE ON THE JUDGEMENT OF DELHI HIGH COURT IN M/S. CHEMINVEST LI MITED VS. DCIT LD.CIT(A) ALLOWED THE APPEAL OF ASSESSEE HOLDING TH AT SINCE ASSESSEE IS HAVING NO EXEMPT INCOME THERE IS NO QUESTION OF D ISALLOWANCE U/S.14A OF THE ACT. AGAINST THIS THE REVENUE IS IN APPEAL BEF ORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS . M. ETHURAJAN (273 ITR 95) CONSIDERED THIS ISSUE BY FOL LOWING THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT V. RA JENDRA PRASAD MOODY [1978] 115 ITR 519 (SC) AND IN THE CASE OF PR ADEEP KAR VS. ACIT REPORTED IN (2009) 319 ITR 0416(KARNATAKA HIGH COURT) WHEREIN HELD THAT:- 5 . THE ASSESSING AUTHORITY CONSIDERED THE DECISION IN RAJENDRA PRASAD MOODY' S CASE [1978] 115 ITR 519 (SC) RELIED UPON BY THE LEARNED COUNSEL AND HELD THAT IT IS NOT APPLICABLE TO THE FACT SITUATION. THE REASONS ASSIGNED FOR SUCH A CONCLUSI ON IN THE ASSESSMENT ORDER ARE EXTRACTED HEREUNDER : 'THE DECISION IS WITH REFERENCE TO DEDUCTION ALLOWA BLE UNDER SECTION 57(III) OF THE INCOME-TAX ACT. THE DECISION RELATES TO AN ASSESS MENT YEAR WHERE DIVIDEND INCOME WAS TAXABLE IN THE HANDS OF THE ASSESSEE. WITH THE INTRODUCTION OF SECTION 10(33) OF THE INCO ME-TAX ACT FROM THE ASSESSMENT YEAR 1998-99 THE POSITION OF LAW IN REGA RD TO TAXABILITY OF DIVIDENDS HAS BEEN CHANGED SINCE SUCH INCOME BECOME S A PART OF INCOME WHICH DO NOT FORM A PART OF TOTAL INCOME OF THE ASSESSEE. THE PROVISIONS OF SECTION 14A ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 8 -: INTRODUCED BY THE FINANCE ACT 2001 WITH EFFECT FR OM APRIL 1 1962 RETROSPECTIVELY BARS ALLOWING ANY EXPENDITURE IN RE SPECT OF INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME. CONSID ERING THIS CHANGE IN THE POSITION OF LAW THE DECISION OF THE SUPREME COU RT RELIED UPON BY THE ASSESSEE DOES NOT APPLY TO THE ASSESSEE' S CASE .' 6. THEREFORE THE DIVIDEND INCOME IS EXEMPTED FROM THE TAX LIABILITY UNDER SECTION 10(33) OF THE ACT. UNDER SECTION 14A OF THE ACT EXPENDITURE RELATING TO EXEMPTED INCOME IS NOT ALLO WABLE. THE ASSESSING AUTHORITY HAS CONSIDERED THE ABOVE RELEVA NT FACTOR AND DISALLOWED THE CLAIM OF THE ASSESSEE. HOWEVER THE FIRST APPELLATE AUTHORITY DECIDED THE ISSUE IN VIEW OF THE ORDER OF THE SPECIAL BENCH IN THE CASE OF CHEMINVES T LTD.V. ITO NEW DELHI (SUPRA) WHICH HAS BEEN REVERSED BY DELHI HIG H COURT. BUT HOWEVER IN THIS CASE THE UNDISPUTED FACTS ARE THAT THE ASSESSEE NOT ABLE TO SHOW THAT SOURCES OF FUNDS WHICH WERE DIVE RTED INTO INVESTMENT IN SHARES WHICH HAS NOT YIELDED ANY DIV IDEND INCOME EVEN IF ASSESSEE EARNED DIVIDEND INCOME IT IS EXEMPTED U/S.10(33) OF THE ACT FROM THE TAX LIABILITY AND THE SAME CANNOT BE C OMPUTED UNDER THE HEAD INCOME FROM OTHER SOURCES. THE EXPENDITURE I NCURRED TO EARN EXEMPTED INCOME IS NOT LIABLE FOR DEDUCTION IN VIEW OF SEC.14A OF THE ACT. IN VIEW OF THIS THE CLAIM OF ASSESSEE IS ONLY UNTENABLE AND DECISION RELIED UPON BY THE LD. A.R BEFORE THE LD. CIT(A) HAVE NO APPLICATION TO THE FA CTS OF THE CASE. FURTHER THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SESHASAYEE PAPER AND BOARDS LTD. REPORTED IN [1985] 156 ITR 542 ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 9 -: (MAD) WHEREIN HELD THAT THE BORROWING HAS NOT BEEN MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF EARNING INTEREST IN WHICH CASE ALONE IT SHOULD BE TAKEN AS INCOME WHICH SHOULD BE DEDUCTED FROM THE INTEREST RECEIPTS. FURTHER HONBLE KARNATAKA HIGH COURT IN THE CASE OF PRADEEP KAR VS. ACIT REPORTED IN (2009) 319 ITR 041 6(KAR HC) WHEREIN HELD THAT DIVIDEND INCOME BEING EXEMPT U/S. 10(33) AND NOT ASSESSABLE TO TAX ASSESSEE WAS NOT ENTITLED TO DED UCTION FOR INTEREST IN VIEW OF SEC.14A OF THE ACT. ACCORDINGLY THIS GROU ND OF THE REVENUE IS ALLOWED. 8. THE NEXT GROUND IN REVENUES APPEALS IN ITA NOS .473 & 474/MDS./2016 IS WITH REGARD TO DELETION OF DISALLO WANCE OF TRADE DISCOUNT GIVEN TO THE SISTER CONCERNS. 8.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE HA S PAID DISCOUNTS TO VARIOUS PARTIES. THIS INCLUDES M/S ETA STAR APPLIAN CES P LTD A RELATED PARTY WHO HAVE RECEIVED A DISCOUNT. SINCE THE PAID UP CAP ITAL OF THE COMPANY EXCEEDS RS. ONE CRORE TRANSACTIONS WITH SUCH PARTI ES ARE COVERED U/S 297(1) OF THE COMPANIES ACT 1956 WHICH STIPULATE T HAT PRIOR APPROVAL OF THE CENTRAL GOVERNMENT IS TO BE OBTAINED IN RESPECT OF SUCH TRANSACTIONS. THE AR WAS ASKED BY A.O WHETHER ANY SUCH APPROVAL WAS RECE IVED FROM THE CENTRAL GOVERNMENT. IN RESPONSE THE AR FURNISHED A DOCUMEN T DATED 15.9.10 FROM THE REGIONAL DIRECTOR SOUTHERN REGION MINISTRY OF CORPORATE AFFAIRS WHEREIN THE APPROVAL WAS GRANTED U/S 297(1) FOR THE PERIOD FROM 13.8.10 ONWARDS ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 10 - : FOR SPECIFIED AMOUNTS. THERE WAS NO APPROVAL FOR T HE FINANCIAL YEAR 2009- 10 PERTAINING TO THE AY 2010-11. IT IS CLEAR THAT THE DISCOUNTS GRANTED TO M/S ETA STAR APPLIANCES P LTD DID NOT HAVE THE APPR OVAL OF THE CENTRAL GOVERNMENT AS STIPULATED BY THE COMPANIES ACT 1956 . THEREFORE THIS EXPENDITURE IS COVERED UNDER THE EXPLANATION TO SEC TION 37(1) SINCE THE EXPENSES HAVE BEEN INCURRED IN VIOLATION OF THE PRO VISIONS OF STATUTE. IN A SIMILAR SITUATION THE ALLAHABAD HIGH COURT IN THE CASE OF ARKAY WIRES P LTD 277 ITR 225 HAD UPHELD THE DISALLOWANCE OF EXPENDIT URE INCURRED IN VIOLATION OF SECTION 314 OF THE COMPANIES ACT 1956. IT IS SI GNIFICANT TO NOTE THAT THIS DECISION WAS RENDERED AFTER THE AMENDMENT TO THE AC T BY THE FINANCE ACT 1998 INTRODUCING THE EXPLANATION TO SECTION 37(1) W .E.F 1.4.1962. IN THE PRESENT CASE IT IS AN ADMITTED FACT THAT THE REQUI SITE APPROVAL U/S 297(1) WAS NOT AVAILABLE FOR THE TRANSACTIONS MADE DURING THE CURRENT YEAR. THEREFORE THE AO HAD NOT ALLOWED THE EXPENDITURE U /S.37(1) OF THE ACT. AGGRIEVED THE ASSESSEE CARRIED THE APPEAL BEFORE T HE LD.CIT(A). 8.2 ON APPEAL LD.CIT(A) OBSERVED THAT THE PAYMENT OF TRADE DISCOUNT DID NOT ATTRACT PROVISIONS OF THE SECTION 40A(2) OF THE ACT AND HE RELIED ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF UNITED EXPORTS VS. CIT REPORTED IN 330 ITR 549(DEL.). FOR THIS PURPOSE HE FURTHER OBSERVED THAT EXPLANATION- 2 TO SEC.37(1) IS NOT APPLICABLE TO HOLD THAT THERE IS A VIOLATION OF COMPANIES ACT. ON THE PAYMENT IS MADE TO SISTER CONCERN THE RE IS NO PRIOR RULE UNDER THE COMPANIES ACT. LD.CIT(A) DIRECTED THE AO TO AL LOW TRADE DISCOUNT AS ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 11 - : CLAIMED BY THE ASSESSEE COMPANY. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 8.3. BEFORE US LD.D.R SUBMITTED THAT ALLOWING OF T RADE DISCOUNT AGAINST THE COMPANIES ACT AND IT IS AGAINST THE PUBLIC POLICY. 8.4 ON THE OTHER HAND LD.A.R SUBMITTED THAT THE SA ME ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF D CIT VS. M/S.POWER SOAPS P. LTD. IN ITA NO.306/MDS./2015 FOR ASSESSMENT YEA R 2010- 11 VIDE ORDER DATED 16 TH SEPTEMBER 2015 WHEREIN THE TRIBUNAL HELD THAT: 8. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND THE DECISION RELIED ON. THE ASSESSING OFFICER WHILE COM PLETING THE ASSESSMENT DISALLOWED TRADE DISCOUNT ALLOWED BY THE ASSESSEE TO ITS SISTER CONCERNS STATING THAT ASSESSEE HAS VIOLA TED THE PROVISIONS OF SECTION 40A(2) OF THE ACT. THE ASSESSING OFFICER WAS OF THE OPINION THAT SINCE SISTER CONCERNS ARE ENJOYING DED UCTION UNDER SECTION 80IB OF THE ACT BY WAY OF SHIFTING PROFITS FROM THE ASSESSEE. THE ISSUE HAS BEEN ELABORATELY CONSIDERED BY THE COMMISSIONER OF INCOME TAX (APPEALS) WITH REFERENCE TO THE FINDI NGS OF THE ASSESSING OFFICER AND THE SUBMISSIONS OF THE ASSESS EE AND FOLLOWING THE VARIOUS HIGH COURT DECISIONS INCLUDIN G THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF A.K.SUBBAR AYA CHETTY & SONS (SUPRA) HELD THAT DISCOUNT ALLOWED TO SISTER C ONCERNS WERE NOT UNREASONABLE AND CANNOT BE EXCESSIVE HAVING REGARD TO THE MARKET RATE. COMMISSIONER OF INCOME TAX (APPEALS) ALSO HEL D THAT ASSESSING OFFICER WAS IN ERROR IN DISALLOWING THE T RADE DISCOUNT UNDER SECTION 40A(2)(A) SINCE TRADE DISCOUNT ALLOW ED TO SISTER CONCERNS CANNOT BE CONSIDERED AS AN ITEM OF EXPENDI TURE INCURRED BY THE ASSESSEE OBSERVING AS UNDER:- 6.1.2 I HAVE CONSIDERED THE FINDINGS GIVEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND ALSO SUBMISSIONS MADE BY T HE AR OF THE APPELLANT ALONG WITH THE JUDICIAL PRONOUNCEMENTS CI TED ON THIS ISSUE. IT IS AN ADMITTED FACT THAT THE TRADE DISCOUNT ALLOWED TO THE SISTER BUSINESS ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 12 - : CONCERNS OF THE APPELLANT WAS BY WAY OF BOOK ADJUST MENT AND THAT THE APPELLANT HAS REALIZED THE SALE AMOUNT NET OF TRADE DISCOUNT. THEREFORE THE APPELLANT CANNOT BE STATED TO HAVE INCURRED ANY EXPENDITURE FOR WHICH PAYMENT WAS MADE SO AS TO ATTRACT THE PROVIS IONS OF SECTION 40A(2)(A). THE DECISION OF THE MADRAS HIGH COURT RE LIED ON BY THE ID AR NAMELY CIT V A.K. SUBBARAYA CHETTY & SONS (SUPRA) CLEARLY SUPPORT THE CASE OF THE APPELLANT. SINCE THE OPERATIVE PORTION OF THIS DECISION HAS ALREADY BEEN REPRODUCED IN THE EARLIER PARAGRAPH T HE SAME IS NOT REPEATED HERE. VERY SAME ISSUE CAME UP RECENTLY BEF ORE THE DELHI HIGH COURT IN M/S UNITED EXPORTS V CIT DELHI [ITA NO 35 6/2009]. IN THIS CASE THE QUESTION BEFORE THE HONORABLE DELHI HIGH C OURT WAS 'WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE TRIBUNAL ERRED IN LAW IN INTERPRETING SECTION 40A(2) AND HOLDING IT APPLICAB LE TO THE APPELLANT WHEN TRADE DISCOUNT IS NOT EXPENDITURE PAID AND IN ANY CASE WHEN IT WAS LESSER SALES REALIZATION' THE ABOVE QUESTION WAS ANSWERED BY THE HONORABLE COURT IN PARAGRAPH 11 AND 12 OF THEIR ORDER WHICH IS REPRODUCED BELOW: ' 11 . LASTLY WE FAIL TO UNDERSTAND HOW THE PROVISIONS OF SECTION 40A(2)(A) ARE AT ALL APPLICABLE IN THE FACTS OF THE PRESENT CASE. SECTION 40A(2)(A) RUNS AS UNDER: '(2)(A) . WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE(B) OF THE SUB-SECTION AND THE (ASSESSING) OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR FACI LITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION'. THIS PROVISION IN THE ACT PERTAINS TO DISALLOWANCE TO AN EXPEN DITURE WHICH IS MADE BY THE ASSESSEE IE AN AMOUNT ACTUALLY SPENT BY THE ASSESSEE AS AN EXPENDITURE. THE EXPRESSION USED IN THIS PROVISION IS 'INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON' [EMPHASIS SUPPLIED.] THE EMPHASIZED WORDS CLEARLY SHOW THAT ACTUAL PAYMENT MUST BE. PAID AND THERE HAS TO BE AN EXPENDITURE INCURRED BEFORE THE PROVISION CAN BE SAID TO BE APPLICABLE. A TRADE DISCOUNT AND ADMITTEDLY IT I S NOT IN DISPUTE THAT THE SUBJECT MATTER OF THE CLAIM IS A TRADE DISCOUNT AND NOT AN EXPENDITURE CLEARLY THEREFORE THERE DOE S NOT ARISE THE QUESTION OF APPLICABILITY OF SECTION 40A(2)(A).12 .(II) THE PROVISION SECTION 40A(2) DID NOT APPLY TO THE FACTS OF THE PRES ENT CASE INASMUCH AS THE TRADE DISCOUNT IS NOT AN EXPENDITURE WHICH IS INCURRED OR WITH RESPECT TO WHICH A PAYMENT IS MADE. THE FACTS OF THE CASE DECIDED BY THE DELHI HIGH COURT AND THE FACTS IN THE CASE UNDER APPEAL ARE IDENTICAL. IN BOTH CASES THE ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 13 - : TRADE DISCOUNT ALLOWED WAS BY WAY OF REDUCING THE DISCOUNT ALLOWED FROM THE SALE AMOUNT. HENCE IT IS A CASE OF LESS REALIZATION OF SALE RATHER THAN INCURRING ANY EXPENDITURE. SIMILAR ISSUE CAME UP BEFORE THE MADHYA PRADESH HIGH COURT IN CIT V UDHOJI SRIKRISHNADAS REPORTED IN 139 ITR 827. IN THIS CASE THE ASSESSEE APPOINTED M/S LALCHAND SHYAMSUNDAR AS THE SOLE SELLING AGENT FOR THE BEEDIS MANUFACTURED BY THE ASSESSEE. THE FIRM WAS ENTITLED TO RECEIVE A COMMISSION OF 10% ON THE SALES. THE AO NOTICED THAT THIS FIRM COULD BE CONSIDERED AS A PERSON' WITHIN THE PURVIEW CLAUSE (B) OF SUB-SECTION (2) OF SECTION 40A AND THAT SINCE THE ASSESSEE HAD SOLD GOODS TO THIS FIRM AT A RATE LOWER THAN THE MARKET RATE THE PROFIT OF RS 6 81 987/- EARNED BY THE FIRM WOULD AMOUNT PAYMENT OF ADDITIONAL COMMISSION. IN VIEW OF THIS MATTER THE AO MADE A DISALLOWANCE OF ` 6 81 987/- U/S 40A(2)(A). IT WAS HELD BY THE COURT THAT THE EXPENDLTURE.TNCURRED BY THE ASSESSEE WAS THE COMMISSION. EVEN IF THE . ASSESSEE SOLD BIDIS TO THE SOLE SELLING AGENTS AT A PRICE LESS THAN THE MARKET RATE THE DIFFERENCE BETWEEN THE MARKET RATE AND THE PRICE AT WHICH THE BIDIS WERE SOLD CANNOT IN OUR OPINION BE TERMED AS EXPENDITURE INCURRED. BY THE ASSESSEE. ON THE FINDING REACHED BY THE TRIBUNAL IT HAS TO BE HELD THAT THE ITO WAS NOT RIGHT IN ADDING RS 6 81 987/- UNDER SECTION 40A(2).' YET ANOTHER CASE WHERE THE DECISION WAS ON SIMILAR LINES CAME BEFORE THE PUNJAB & HARYANA HIGH COURT RECENTLY IN CIT V RAJNISH AHUJA [2013] 85 CCH 004 (PHHC) [2013] 219 TAXMAN 85 (MAG) (P&H) HE. IT WAS HELD THAT 'SECTION 40A(2) CONTEMPLATES AN ASSESSEE INCURRING ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MADE OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF SECTION 40A(2). IF THERE WERE ANY SUCH EXPENDITURE AND IF THE ITO WAS OF THE OPINIOTI THAT SUCH EXPENDITURE WAS EXCESSIVE OR UNREASONABLE THEN SO MUCH OF THE EXPENDITURE AS WAS CONSIDERED BY HIM AS EXCESSIVE OR UNREASONABLE WAS NOT TO BE ALLOWED AS DEDUCTION. WE THEREFORE HAVE TO CONSIDER WHETHER THERE WAS ANY EXPENDITURE IN THIS CASE. IT WAS HELD BY THE TRIBUNAL THAT THE AO MADE THE ADDITION SOLELY ON TH E GROUND THAT THE ASSESSEE HAD CHARGED LESS SALE PRICE FROM THE S ISTER CONCERNS. THE PROVISIONS OF SECTION 40A COULD NOT B E INVOKED AS NO PAYMENT HAS BEEN MADE TO THE SISTER CONCERNS FOR ANY ITEM OF EXPENDITURE WHICH THE ASSESSEE MIGHT HAVE BEEN CLAI MED AS REVENUE EXPENDITURE.' THE TRIBUNAL FOUND THAT THE TAXPAYER CAN MANAGE HIS AFFAIRS TO REDUCE TAX LIABILITY WITHIN THE FRAME WORK OF LAW AND THAT THE SALE OF GOODS AT A LESSER PRICE TO THE SISTER CONCERNS THAN THE NON SISTER CONCERNS DOES NOT VIOLATE ANY PROVISIONS OF LAW. IT WAS FOUND THAT THE FINDING RECORDED BY THE TRIBUNAL DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. IT WAS HELD THAT THE ASSESSEE HAD NOT VIOLATED ANY PROVISIONS OF LAW WHILE MAKING SALES TO SISTER CONCERNS AT A LESSER RATE THAN NON SISTER CONCERNS. 6.1.3 RESPECTFULLY FOLLOWING THE DECISIONS CITED ABOVE THAT THE AO CLEARLY IN ERROR IN DISALLOWING THE SUM OF RS.5 04 03 180/- ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 14 - : U/S 40A(2)(A) SINCE THE TRADE DISCOUNT ALLOWED TO ITS SISTER CONCERNS CANNOT BE CONSIDERED AS AN ITEM OF EXPENDITURE INCURRED BY THE APPELLANT. ALSO NO PAYMENT ON THE PART OF THE APPELLANT TO THE SISTER CONCERN ON THIS SCORE TO ATTRACT THE PROVISIONS OF SECTION 40A(2)(A). THE CASES CITED BY THE AO ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. AS POINTED OUT BY THE AR OF THE APPELLANT IN ALL THOSE CASES PAYMENT OF COMMISSION OR INTEREST TO 'PERSONS' REFERRED TO IN CLAUSE (B) OF SECTION 40A(2) WAS CLEARLY ESTABLISHED ATTRACTING THE APPLICATION OF THIS PROVISION. IT IS SEEN THAT OUT OF THE TOTAL SALE OF ACI D SLURRY OF RS.56 67 70 241/- SALES TO THE SISTER CONCERNS WERE ` 55 65 16 559/- WHICH WORKS OUT TO ` 98.19 PERCENTAGE OF THE TOTAL SALES. FURTHER EVEN AFTER ALLOWING DISCOUNT THE RATE AT WHICH THE QOODS WERE SOLD TO SISTER CONCERNS WAS MORE THAN THE RATE AT WHICH THE SALE WAS EFFECTED TO OTHERS. ONLY IN THE CASE OF M/S. ULTRAMARINE & PIGMENTS LTD THE RATE WAS SLIGHTLY MORE. IT IS SEEN THAT THE PURCHASER WAS RELATIVELY NEW TO THE APPELLANT AND LONGER CREDIT WAS ALLOWED. IT NEEDS HARDLY ANY EMPHASIS THAT BULK PURCHASERS ENJOY BETTER BARGAINING POWER AND THEREFORE ARE ABLE TO GET LOWER RATE AND DISCOUNT. IT IS SEEN THAT THE RATE AT WHICH THE GOODS WERE SOLD TO SISTER CONCERNS WERE NOT A RIDICULOUSLY LOW RATE BUT WERE AT REASONABLE RATES COMPARED TO THE SALE TO OTHERS. THEREFORE IT CANNOT BE CONSIDERED THAT THE DISCOUNT ALLOWED TO SISTER CONCERNS WAS UNREASONABLE AND WAS EXCESSIVE HAVING REGARD TO THE MARKET RATE. HENCE THE GROUNDS OF APPEAL FILED BY THE APPELLANT ON THIS ISSUE ARE ALLOWED AND TREATED AS DISPOSED OFF ACCORDINGLY. 9. ON GOING THROUGH THE ORDER OF THE COMMISSIONER O F INCOME TAX (APPEALS) WE DO NOT FIND ANY VALID REASON TO INTER FERE WITH HIS FINDINGS. THE REVENUE HAS NOT FILED ANY EVIDENCE TO REBUT THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) THEREF ORE WE SUSTAIN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) AND DISMISS THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE. IN OUR OPINION IF THE EXPENDITURE IS DEBITED TO THE P&L A/C AND CLAIM IT AS AN EXPENDITURE IN COMPUTING THE INCOME OF ASSESSEE PR OVISIONS OF THE SECTION 40A(2) OF THE ACT IS APPLICABLE. BEFORE US LD.A.R SUBMITTED THAT IT IS ONLY THE DEDUCTION IN THE SALES VALUE MADE TO THE SISTER CON CERNS AND IT IS NOT CLAIMED AS EXPENDITURE IN THE BOOKS OF ACCOUNT OF A SSESSEE AND DISCOUNT ITA NOS.469 TO 474/MDS./2016 CO NOS.58 TO 63/MDS./16 :- 15 - : WAS PASSED BY THE ASSESSEE WHILE MAKING THE SALE IT SELF AND THERE IS NO SEPARATE DISCOUNT WAS CLAIMED BY THE ASSESSEE. HOWE VER WE FIND THAT THIS FACT HAS NOT COME FROM THE ORDERS OF THE LOWER AUTH ORITIES. IN OUR OPINION UNLESS THE ENTIRE FACTS ARE BROUGHT ON RECORD WE A RE NOT IN A POSITION TO APPRECIATE THE FINDINGS OF THE LD.CIT(A) SO IN THE INTEREST OF JUSTICE WE REMIT THE ISSUE TO THE FILE OF AO WHETHER THE TRADE DISCO UNT IS GIVEN TO THE SISTER CONCERN IN THE SALES BILLS ITSELF OR SEPARATE CREDI T HAS BEEN GIVEN AFTER THE SALES HAS BEEN EFFECTED. IF THE SEPARATE SALES DISC OUNT IS GIVEN AFTER THE SALES THEN THE PROVISIONS OF THE SECTION 40A(2) BE APPLIED. WITH THIS OBSERVATION WE REMIT THE ISSUE TO THE FILE OF AO F OR FRESH CONSIDERATION. 9. ALL THE CROSS OBJECTIONS FILED BY THE ASSESSEE IS SUPPORTIVE OF CIT(A)S ORDER IT DOES NOT REQUIRE SEPARATE ADJUDICATION. 10. IN THE ALL THE APPEALS OF THE REVENUE ARE PART LY ALLOWED FOR STATISTICAL PURPOSES AND ALL THE CROSS OBJECTIONS RAISED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON 05 TH OCTOBER 2016 AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER / CHENNAI !' / DATED: 05 TH OCTOBER 2016. K S SUNDARAM #!$%%&' (% )( / COPY TO: % 1 . / APPELLANT 3. #%# *%+ / CIT(A) 5. (-.%&&/0 / DR 2. / RESPONDENT 4. #%# * / CIT 6. .12%3 / GF