IN INCOME TAX APPELLATE TRIBUNAL 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, 2009-10, 2010-11 & 2011-12 & C.O. Nos.58, 59, 60, 61, 62 & 63/Mds./2016 Deputy Commissioner of Vs. M/s. ETA Star Appliances Pvt Income Tax, Ltd., Corporate Circle-2(1), 71,Sterling Road, Chennai 600 034. 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 : 06-09-2016 Date of Pronouncement : 05-10-2016 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER These four appeals of Revenue are directed against different orders of Commissioner of Income-tax (Appeals)-6, Chennai dated 23.12.2015 and correspondingly, assessee fled Cross Objections in support of order of Ld.CIT(A). Since issues :- 2 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 involved in all these Revenue s appeals as well as assessee s corresponding Cross Objections are common in nature, these appeals & C.Os are clubbed together, heard together, disposed off by this common order for sake of convenience. 2. first common ground in Revenue s 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 dealers, which is only provision. 3. facts of issue are that assessee claimed Service Commission in these assessment years as expenditure, when air conditioners were sold to dealers. According to AO, expenditure which is booked at time of sale is only provisional expenditure. actual expenditure will accrue, only when particular unit is sold by dealer and installed at customer s premises. There is no certainty that all units sold to dealer would in turn be sold to customer within same year. Therefore, only total expenditure incurred on issue of credit notes to dealers at time of selling by dealer to customer is allowable for deduction. In this case, provision so created during year was disallowed by AO. Aggrieved by order of AO, assessee carried appeal before Ld.CIT(A). :- 3 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 3.1 On appeal, Ld.CIT(A) allowed claim of assessee with following observations. (a) liability is created out of event of sale. In case of assessee company, sale is obligating event . event of sale has created present obligation of Service Commission for assessee company. (b) As can be noted from narration of facts in present case, obligating events i.e sale creates liability that involves outflow of resources. (c) assessee company has definite policy for estimating obligation that goes into creation of provision. provision, as we have seen in scheme of accounting entries by assessee company is created under matching concept at time of sale. liability is prefixed and embedded in sale amount. Different orders of air conditioners sold by assessee company bring in different pre fixed liability. To note sample few instances from pricing policy of company, element of Service Commission embedded in sale is as under: Model MRP Service Commission AKG9G 17,940 400 AXZ18GPN 26,490 600 ASG18 42,990 800 AWG24 49,990 800 (d) provision is created only on event of sale and in predetermined manner as ordained by pricing policy of assessee company. Hence, it can be said estimation of provision is scientific and reliable. :- 4 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 (e) assessee company undertakes review of amounts outstanding in provision at each balance sheet date, and as per its policy, writes back amount outstanding in provision account for three years as income. (f) On perusal of Service Commission account of assessee company, it is observed that liability created under matching concept is continuously being discharged by issuance of credit notes to dealers as per accounting treatment narrated supra. credit notes passed on dealers per narration available in Service Commission. Against order of Ld.CIT(A), Revenue is in appeal before us. 4. We have heard both parties and perused material on record. main contention of ld.D.R is that Service Commission is only provision made in books of accounts and it was not actually incurred. On other hand, ld.A.R submitted that assessee has been following same system of book keeping consistently from year to year and this Sales Commission embedded to sales. Whenever assessee makes sales corresponding liability attached to assessee to maintain air conditioners in better condition of operations for particular period and for which assessee is providing free maintenance warranty, which involves cost to be borne by assessee for which assessee is making provision in books of account of assessee. Further, he submitted :- 5 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 that when assessee recognized income on sale of air conditioners at same time on provisional basis, provision towards services created by assessee. According to him, Department cannot disturb consistent method of accounting followed by assessee. In our opinion, if Service Commission is directly attached to sales made by assessee and as soon as sales are accounted corresponding service charges/commission to be incurred by assessee to be booked in books of account of assessee. Accordingly, we are inclined to remit issue to file of AO to verify books of accounts of assessee whether Service Commission is debited when sales made and if assessee charges service commission as soon as sales is made, claim of assessee is to be allowed, as it is related to sales of air conditioners. With this observation, we remit issue to file of AO for fresh consideration. 5. next ground in Revenue s appeal in ITA Nos. 470/Mds./16 is with regard to deletion of disallowance u/s.14A of Act 6. facts of case are that during course of assessment proceedings, AO found that assessee holds investments of Rs.8,71,81,818/- in equity shares which are capable of generating tax free income. Therefore provisions of 14A are attracted and these are worked out as per provisions of Rule 8D. AR during course of hearing :- 6 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 stated that these are old investments and provisions u/s 14A are not attracted and that no expenditure had been incurred on investment. Moreover very fact that there are investments would 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 provisions of Sec.14A r.w.r. 8D are clearly attracted in this case. Section 14A(3) specifically states that provisions would apply even if assessee claims that no expenditure was incurred. As per provisions of Section 14A of Act, any sum incurred for earning income exempt from tax cannot be allowed as expenditure in computing taxable income. It essentially means that expenses debited to Profit & Loss Account of assessee company are to be divided into two categories viz., one relating to exempt stream of income and other relating to taxable stream of income. expenses relating to exempt stream of income cannot be claimed against taxable stream of income. It is not necessary that there should be any income earned during year. expenditure incurred for earning income can be lesser than income itself. On some occasions, there could not even be any income though expenses are incurred towards earning same. Even in such circumstances, provisions of section 14A read with rule 8D were held to be applicable relying on judgement of Special Bench of ITAT, Delhi in M/s. Cheminvest Limited Vs. DCIT (ITA 2048/Del/2005) and by ITAT, Chennai and computed disallowance as per provisions of Rule 8D of I.T Rules. Accordingly, AO disallowed :- 7 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 amount of `25,69,031/-. Aggrieved, assessee carried appeal before Ld.CIT(A). 6.1 On appeal, Ld.CIT(A) observed that placing reliance on judgement of Delhi High Court in M/s. Cheminvest Limited Vs. DCIT, Ld.CIT(A) allowed appeal of assessee holding that since assessee is having no exempt income, there is no question of disallowance u/s.14A of Act. Against this, Revenue is in appeal before us. 7. We have heard both parties and perused material on record. Hon ble Madras High Court in case of CIT Vs. M. Ethurajan (273 ITR 95) considered this issue by following judgement of Supreme Court in case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) and in case of Pradeep Kar Vs. ACIT reported in (2009) 319 ITR 0416(Karnataka High Court) wherein held that:- 5. assessing authority considered decision in Rajendra Prasad Moody' s case [1978] 115 ITR 519 (SC) relied upon by learned counsel and held that it is not applicable to fact situation. reasons assigned for such conclusion in assessment order are extracted hereunder : "The decision is with reference to deduction allowable under section 57(iii) of Income-tax Act. decision relates to assess ment year where dividend income was taxable in hands of assessee. With introduction of section 10(33) of Income-tax Act from assessment year 1998-99 position of law in regard to taxability of dividends has been changed since such income becomes part of income which do not form part of total income of assessee. provisions of section 14A :- 8 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 introduced by Finance Act, 2001, with effect from April 1, 1962, retrospectively bars allowing any expenditure in respect of income which is not includible in total income. Considering this change in position of law decision of Supreme Court relied upon by assessee does not apply to assessee' s case." 6. Therefore, dividend income is exempted from tax liability under section 10(33) of Act. Under section 14A of Act, expenditure relating to exempted income is not allowable. assessing authority has considered above relevant factor and disallowed claim of assessee. However, first appellate authority decided issue in view of order of Special Bench in case of Cheminvest Ltd.v. ITO New Delhi (supra), which has been reversed by Delhi High Court. But, however in this case undisputed facts are that assessee not able to show that sources of funds, which were diverted into investment in shares, which has not yielded any dividend income, even if assessee earned dividend income, it is exempted u/s.10(33) of Act from tax liability and same cannot be computed under head income from other sources . expenditure incurred to earn exempted income is not liable for deduction in view of Sec.14A of Act. In view of this, claim of assessee is only untenable and decision relied upon by ld.A.R before Ld. CIT(A) have no application to facts of case. Further, jurisdictional High Court in case of CIT Vs. Seshasayee Paper And Boards Ltd. reported in [1985] 156 ITR 542 :- 9 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 (Mad) wherein held that borrowing has not been made exclusively and wholly for purpose of earning interest, in which case alone it should be taken as income, which should be deducted from interest receipts. Further, Hon ble Karnataka High Court in case of Pradeep Kar Vs. ACIT reported in (2009) 319 ITR 0416(Kar HC) wherein held that dividend income being exempt u/s.10(33) and not assessable to tax, assessee was not entitled to deduction for interest in view of Sec.14A of Act. Accordingly, this ground of Revenue is allowed. 8. next ground in Revenue s appeals in ITa Nos.473 & 474/Mds./2016 is with regard to deletion of disallowance of trade discount given to sister concerns. 8.1 facts of case are that assessee has paid discounts to various parties. This includes M/s ETA Star Appliances P Ltd, related party who have received discount. Since paid up capital of Company exceeds Rs. One Crore, transactions with such parties are covered u/s 297(1) of Companies Act, 1956 which stipulate that prior approval of Central Government is to be obtained in respect of such transactions. AR was asked by A.O whether any such approval was received from Central Government. In response, AR furnished document dated 15.9.10 from Regional Director, Southern Region, Ministry of Corporate Affairs wherein approval was granted u/s 297(1) for period from 13.8.10 onwards :- 10 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 for specified amounts. There was no approval for Financial Year 2009- 10, pertaining to AY 2010-11. It is clear that discounts granted to M/s ETA Star Appliances P Ltd did not have approval of Central Government as stipulated by Companies Act, 1956. Therefore, this expenditure is covered under Explanation to Section 37(1), since expenses have been incurred in violation of provisions of statute. In similar Situation, Allahabad High Court in case of Arkay Wires P Ltd 277 ITR 225 had upheld disallowance of expenditure incurred in violation of Section 314 of Companies Act, 1956. It is significant to note that this decision was rendered after amendment to Act by Finance Act, 1998 introducing Explanation to Section 37(1) w.e.f 1.4.1962. In present case, it is admitted fact that requisite approval u/s 297(1) was not available for transactions made during current year. Therefore, AO had not allowed expenditure u/s.37(1) of Act. Aggrieved, assessee carried appeal before Ld.CIT(A). 8.2 On appeal, Ld.CIT(A) observed that payment of trade discount did not attract provisions of section 40A(2) of Act and he relied on judgement of Delhi High Court in 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 violation of Companies Act. On payment is made to sister concern, there is no prior rule under Companies Act. Ld.CIT(A) directed AO to allow trade discount as :- 11 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 claimed by assessee company. Against this, Revenue is in appeal before us. 8.3. Before us, ld.D.R submitted that allowing of trade discount against companies Act and it is against public policy. 8.4 On other hand, ld.A.R submitted that same issue came up for consideration before this Tribunal in case of DCIT Vs. M/s.Power Soaps P. Ltd., in ITA No.306/Mds./2015 for assessment year 2010-11 vide order dated 16th September, 2015 wherein Tribunal held that: 8. Heard both sides. Perused orders of lower authorities and decision relied on. Assessing Officer while completing assessment disallowed trade discount allowed by assessee to its sister concerns stating that assessee has violated provisions of section 40A(2) of Act. Assessing Officer was of opinion that since sister concerns are enjoying deduction under section 80IB of Act by way of shifting profits from assessee. issue has been elaborately considered by Commissioner of Income Tax (Appeals) with reference to findings of Assessing Officer and submissions of assessee and following various High Court decisions including decision of jurisdictional High Court in case of A.K.Subbaraya Chetty & Sons (supra) held that discount allowed to sister concerns were not unreasonable and cannot be excessive having regard to market rate. Commissioner of Income Tax (Appeals) also held that Assessing Officer was in error in disallowing trade discount under section 40A(2)(a) since trade discount allowed to sister concerns cannot be considered as item of expenditure incurred by assessee observing as under:- 6.1.2 I have considered findings given by assessing officer in assessment order and also submissions made by AR of appellant along with judicial pronouncements cited on this issue. It is admitted fact that Trade Discount allowed to sister business :- 12 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 concerns of appellant was by way of book adjustment and that appellant has realized sale amount net of Trade Discount. Therefore, appellant cannot be stated to have incurred any expenditure for which payment was made, so as to attract provisions of section 40A(2)(a). decision of Madras High Court relied on by Id AR, namely, CIT v A.K. Subbaraya Chetty & Sons (supra) clearly support case of appellant. Since operative portion of this decision has already been reproduced in earlier paragraph, same is not repeated here. Very same issue came up recently before Delhi High Court in M/s United Exports v CIT, Delhi [ITA No 356/2009]. In this case question before Honorable Delhi High Court was "Whether in facts and circumstances of case, Tribunal erred in law in interpreting section 40A(2) and holding it applicable to appellant, when Trade Discount is not, expenditure paid and in any case, when it was lesser sales realization" above question was answered by Honorable Court in paragraph 11 and 12 of their order, which is reproduced below: " 11. Lastly we fail to understand how provisions of section 40A(2)(a) are, at all, applicable in facts of present case. Section 40A(2)(a) runs as under: "(2)(a) . Where 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 sub-section, and (Assessing) Officer is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business or profession of assessee or benefit derived by or accruing to him there from, so much of expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction". This provision in Act pertains to disallowance to expenditure which is made by assessee ie, amount actually spent by assessee as expenditure. 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.] emphasized words clearly show that actual payment must be. paid and there has to be expenditure incurred before provision can be said to be applicable. Trade Discount, and admittedly it is not in dispute that subject matter of claim is Trade Discount and not expenditure, clearly therefore there does not arise question of applicability of section 40A(2)(a) .12.(ii) provision section 40A(2) did not apply to facts of present case inasmuch as Trade Discount is not expenditure which is incurred or with respect to which payment is made. facts of case decided by Delhi High Court and facts in case under appeal are identical. In both cases :- 13 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 Trade Discount allowed was by way of reducing discount allowed from sale amount. Hence, it is case of less realization of sale, rather than incurring any expenditure. Similar issue came up before Madhya Pradesh High Court in CIT v Udhoji Srikrishnadas reported in 139 ITR 827. In this case assessee appointed M/s Lalchand Shyamsundar, as sole selling agent for Beedis manufactured by assessee. firm was entitled to receive commission of 10% on sales. AO noticed that this firm could be considered as person' within purview clause (b) of sub-section (2) of section 40A and that, since assessee had sold goods to this firm at rate lower than market rate, profit of Rs 6,81,987/- earned by firm would amount payment of additional commission. In view of this matter, AO made disallowance of `6,81,987/- u/s 40A(2)(a). It was held by Court that expendlture.tncurred by assessee was commission. Even if . assessee sold bidis to sole selling agents at price less than market rate, difference between market rate and price at which bidis were sold cannot, in our opinion, be termed as expenditure incurred. by assessee. On finding reached by Tribunal, it has to be held that ITO was not right, in adding Rs 6,81,987/- under section 40A(2)." Yet another case where decision was on similar lines came before 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 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 ITO was of opinioti that such expenditure was excessive or unreasonable, then so much of 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 Tribunal that AO made addition solely on ground that assessee had charged less sale price from sister concerns. provisions of section 40A could not be invoked as no payment has been made to sister concerns for any item of expenditure which assessee might have been claimed as revenue expenditure." Tribunal found that taxpayer can manage his affairs to reduce tax liability within frame work of law and that sale of goods at lesser price to sister concerns than non sister concerns does not violate any provisions of law. It was found that finding recorded by Tribunal does not give rise to any substantial question of law. It was held that assessee had not violated any provisions of law while making sales to sister concerns at lesser rate than non sister concerns. 6.1.3 Respectfully following decisions cited above, that AO clearly in error in disallowing sum of Rs.5,04,03,180/- :- 14 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 u/s 40A(2)(a), since Trade Discount allowed to its sister concerns cannot be considered as item of expenditure incurred by appellant. also no payment on part of appellant to sister concern on this score to attract provisions of section 40A(2)(a). cases cited by AO are not applicable to facts of present case. As pointed out by AR of 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 application of this provision. it is seen that out of total sale of Acid Slurry of Rs.56,67,70,241/-, sales to sister concerns were ` 55,65,16,559/- which works out to `98.19 percentage of total sales. Further even after allowing discount, rate at which qoods were sold to sister concerns was more than rate at which sale was effected to others. Only in case of M/s. Ultramarine & Pigments Ltd rate was slightly more. It is seen that, purchaser was relatively new to 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 rate at which goods were sold to sister concerns were not ridiculously low rate, but, were at reasonable rates compared to sale to others. Therefore it cannot be considered that discount allowed to sister concerns was unreasonable and was excessive having regard to market rate. Hence, grounds of appeal filed by appellant on this issue are allowed and treated as disposed off accordingly. 9. On going through order of Commissioner of Income Tax (Appeals), we do not find any valid reason to interfere with his findings. Revenue has not filed any evidence to rebut findings of Commissioner of Income Tax (Appeals), therefore we sustain order of Commissioner of Income Tax (Appeals) and dismiss grounds raised by Revenue on this issue. In our opinion if expenditure is debited to P&L A/c and claim it as expenditure in computing income of assessee, provisions of section 40A(2) of Act is applicable. Before us, ld.A.R submitted that it is only deduction in sales value made to sister concerns, and it is not claimed as expenditure in books of account of assessee and discount :- 15 -: ITA Nos.469 to 474/Mds./2016 CO Nos.58 to 63/Mds./16 was passed by assessee while making sale itself, and there is no separate discount was claimed by assessee. However, we find that this fact has not come from orders of lower authorities. In our opinion, unless entire facts are brought on record, we are not in position to appreciate findings of Ld.CIT(A), so in interest of justice we remit issue to file of AO whether trade discount is given to sister concern in sales bills itself or separate credit has been given after sales has been effected. If separate sales discount is given after sales, then provisions of section 40A(2) be applied. With this observation, we remit issue to file of AO for fresh consideration. 9. All Cross Objections filed by assessee is supportive of CIT(A) s order, it does not require separate adjudication. 10. In all appeals of Revenue are partly allowed for statistical purposes and all Cross objections raised by assessee are dismissed. Order pronounced on 05th October, 2016, at Chennai. Sd/- Sd/- (G.PAVAN KUMAR) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 05th October, 2016. K S Sundaram Copy to: 1. Appellant 3. CIT(A) 5. DR 2. Respondent 4. CIT 6. GF Deputy Commissioner of Income Tax, Corporate Circle-2(1), Chennai v. M/s. ETA Star Appliances Pvt Ltd