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M/s. Speed Eicher Versus The Income Tax Officer

2015 (3) TMI 884 - ITAT AHMEDABAD

Disallowance of trade discount expenses paid in Cash - sale of tractors to farmers - onus to prove genuineness of discount - difference in the expenditure recorded in the ledger account and the cash-book - Held that:- In the instant case, the appellant has not able to demonstrate, why it has offered cash discount to the customers sometimes after one month from the sale effected. It is also seen from the discount offered that the rate varies from 8 to 8.5%. This kind of cash discount is naturally .....

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much after the sales were affected. When the tractors were sold to the customers, they had already had bank accounts then why the appellant did not pay them in cheques the discount instead of paying in cash.

The contention of the Id. AR that cash discounts are offered to the customers to avail full bank loan and to facilitate margin money also do not hold much water because the question of margin money arises before the loan sanctioned and it should have been in the account of the lo .....

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see. The contention of the assessee is that such trade discounts are allowable and is prevalent in the similar line of business. During the course of hearing, a query was raised as to how come the payment of discount to the purchasers of the tractors was made in installments and even before or after the tractor has been sold. The ld.counsel for the assessee could not give any satisfactory reply to the query. In our considered view, the assessee failed to prove the expenditure with satisfactory e .....

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t) dated 31/07/2010 pertaining to Assessment Year (AY) 2007-08. The assessee has raised the following grounds of appeal:- (1) The learned CIT(Appeals) erred in law as well as on facts while confirming the order of the ITO, Ward 4, Navsari making disallowance of trade discount expenses to the extent of ₹ 49,90,640/-. (2) The learned CIT(Appeals) failed to allow the appellant an opportunity of being heard and rebutting the issues involved in the Grounds of Appeal raised by placing cogent and .....

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discount confirmed by the CIT(Appeals) on misleading, misconceived, baseless and conjectural observations, is unjustified. (4) Both the lower authorities ought to have consider in the right perspectives that the trade discount, deducted in each individual sale transaction and actually passed on to the respective customers by the appellant firm and therefore, being actually incurred wholly and exclusively for the purposes of business, is an allowable deduction for computation of business income. .....

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amed vide order dated 04/12/2009, thereby the Assessing Officer (AO in short) made disallowance of trade discount expenses of ₹ 49,90,640/-, disallowance of office expense of ₹ 5,571/- and disallowance of repair & maintenance expense of ₹ 7,236/-. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions, partly allowed the appeal. While allowing the appeal, the ld.CIT(A) confirmed the addition made on account of trade discount e .....

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y interference under the facts and circumstances of the present case. He submitted that the AO has noted in the assessment order that there was difference in the expenditure recorded in the ledger account and the cash-book. He submitted that the AO has pointed out that trade discount payments range between ₹ 60,000/- to ₹ 80,000/-, whereas in cash-book the payments are below ₹ 20,000/-. 5. We have heard the rival submissions, perused the material available on record and gone th .....

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rship agreement entered into with TAPE Motors & Tractors Ltd. since the F.Y. 2005-06 and accordingly, showing the income earned from this business activities in the return of income filed year to year. The return of income for the year under appeal has been filed by the appellant firm showing the total taxable income of ₹ 3,10,170/- accompanied with the tax audit report u/s 44AB (in Form No. 3CB and 3CD) of the Act, audited financial statements such as Trading A/c, Profit & Loss A/ .....

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has to allow the trade discount to the purchasers who are basically the agriculturists as the practice prevailing in this line of business. In other words, the appellant has to maintain the target of sales/turnover for its survival and for that purposes, the trade incentive under the sales promotion programme has been given on catalogue price of tractors, to the purchasers of tractors only on prompt payment received through Demand Drafts from the purchasers. Thus, the trade discount is in the n .....

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of tractors but the said transaction of trade discount has been disbelieved by both the lower authorities capriciously, arbitrarily, merely on suspicion and doubt, in spite of all the details of trade discount on sales of tractors has been furnished. More particularly, the appellant firm has furnished on their records the complete names, addresses and identity proofs with the confirmations and affidavits of the purchasers, date of demand draft received with amount, date of invoice issued, total .....

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avits, identity proofs of the purchasers, their bank loan statements, insurance policies, RTO registration proof, sales invoices, etc. which simultaneously goes to prove that the trade discount has been given only at the time of sale of tractors. (3) As a matter of fact, during the course of assessment proceedings, the appellant furnished all the details of sales of 74 tractors to various customers (agriculturists) and explained the transactions of sales and trade discount given " thereon b .....

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ed statement showing the transactions of sales and trade discount thereon establishing direct co.-relation with the demand drafts deposited in the bank account, which amply demonstrate that there is not a single instance of allowing trade discount to the customers before or after the date of sale of tractors and thus, the allegations of both the lower authorities has no weightage in the eyes of law. As a matter of fact, both the lower authorities have grossly failed to understand in the right an .....

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ade discount in cash to all the customers at the prevailing rate of trade discount in the open market. Merely because the trade discount has been given in cash to the various customers, the learned AO disallowed the same purely on suspicion and doubts even though; the appellant has furnished before him the confirmation letters of such customers duly confirming of receiving trade discount in cash so as to meet the requirement of margin money on tractor banks loan taken by them. (4) Your honours, .....

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trade discount, it could not be termed as an expenditure, but in true effect, it is on the sales of tractors. In this regard, I may draw your honour's kind attention to the relevant judgment of the Hon'ble High Court of Delhi in United Exports Vs. CIT reported in (2011) 230 ITR 549 (Delhi) in which the Hon'ble High Court held that - "This provision in the Act pertains to disallowance to an expenditure which is made by the assessee Le. an amount actually spent by the assessee as .....

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ere does not arise the question of applicability of section 40A(2)(b)" Sir, the above judgment of Delhi High Court has been followed by the Hon'ble ITAT, Delhi in the case of ACIT Vs. Grandprix Fab. (P) Ltd. reported in (2010) 128 TTJ (Del.) Page 60 in which it has been held that the trade discount is not an expenditure and therefore, there is no lawful reason to make disallowance of the same as expenditure under the law. Your honours will certainly find in the audited Trading A/c attac .....

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h the lower authorities have rightly accepted the sales of tractors made to the various customers during the relevant year. To put it differently, both the lower authorities have failed to understand and appreciate in the right perspectives that the trade discount is only at the instance of sales, based on the quantum of sales, which could not be denied simply because it has been shown separately in the audited books of accounts. It is further enlightened to your honours that the books of accoun .....

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. Kindly see pages 21 of 28 of appeal papers being the ledger of trade discount given to the various customers at the time sales with detailed explanations given to both the lower authorities. Unfortunately, the trade discount has been disbelieved on the another allegation of mismatch of trade discount in ledger account and so called cash book. As a matter of fact, during the course of assessment proceedings, all the ledger and cash and bank book, purchase and sales register and other relevant r .....

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enditure on different dates, otherwise, the total amount of trade discount and the sales duly tallied with the audited cashbook and ledger. Sir, the appellant firm is carrying on its business in the village area of Chikhli, Dist: Navsari having not any standard accounting software and therefore, such inadvertent mistake on the part of accountant occurred, which has been treated as the in genuine transaction of trade discount brushing aside all the other credible and authentic evidences i.e. bank .....

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ely upon the judgment of the Hon'ble High Court of Allahabad, Lucknow Bench in the case of Asstt.CIT Vs. Vikram Tractors reported in (2008) 5 DTK (All.) Page 323 (copy attached) (5) Without prejudice to the above, I would like to further submit that in accounting principles, considering the nature of transaction of sales of goods (i.e. tractors), the appellant could have directly deducted trade discount from sales, since, it is on the sales of goods and accordingly, the sales or turnover cou .....

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appellant firm has followed the same method of accounting consistently in as much as the gross sales of goods and trade discount has been shown separately in Trading A/c, which has been accepted by the department in the earlier as well in the subsequent years. Kindly see pages 50 to 66 being the ITRs and computation of income from the AssttYear; 2006-07 to 2009-10 as well as regular assessment order u/s 143(3) of the Act for the AssttYear; 2009-10 passed by the same ITO rightly accepting the sam .....

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the contention that when the accounting system adopted by the appellant is not contrary to the prescribed accounting standards then the revenue authorities has no lawful reason to disallow the claim of trade discount for which, the detailed explanations with evidences furnished. In this regard, I may rely upon the following relevant judgments:- (i) CIT Vs. Siddarth Trade Links (P) Ltd. (2012) 206 Taxmann 92 (Del) Para 4 and 5 (ii) ITO Vs. Sivalingam Agencies (1994) 50 ITD 509 (Mad.) (iii) CIT Vs .....

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Particulars Assessment Years 2006-07 2007-08 Sales/Turnover (including trade discount) 3,79,80,293/- 3,72,74,099/- Trade Discount (Rs.) 57,13,957/- 49,90,640/- Percentage of Trade Discount (%) 15.05% 13.38% Gross Profit (Rs.) 33,60,116/- 26,46,262/- Gross Profit Ratio 7.28% 7.08% Net Profit (Rs.) 2,50,130/- 3,10,170/- From the comparison of trading results with the immediate earlier year, your honours will certainly appreciate the very fact that the appellant has shown almost the same G.P. ratio .....

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disbelieved on such vague grounds raised by the AO, the Gross Profit would be ₹ 76,30,901/- and the G.P. ratio would be 20.47% which is unrealistic, unfair, unreasonable and irrational looking to the income tax records of the appellant firm and much less, the normal Gross Profit margin prevailing in this line of business as dealers in tractors. It is further enlightened here that the purchases and sales as recorded in the audited books of accounts supported by the invoices/bills are duly a .....

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er, for claiming such expenditure the onus is upon the assessee to prove the expenditure has in fact been incurred. We find that the AO has given a finding that in the case of one Shri Manojbhai C. Shah, the sale was effected on 20/03/2007, however, the payment of so-called trade discount is made on 25/03/2007, 26/03/2007, 27/03/2007, 28/03/2007, 29/03/2007 & 30/03/2007 and all payments below ₹ 20,000/-. Similarly, in the case of Maganbhai D.Patel, the sale was effected on 27/03/2007, .....

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ld.CIT(A) hereinbelow:- 5.1. Decision; I have carefully considered the findings of the AO in the assessment order and the submissions made by the Id. AR. As mentioned in the earlier paragraphs, the AO made the addition after being convinced that the cash discount shown by the appellant was apparently not genuine and afterthought. To justify the conclusion, the AO stated that i) the bills and vouchers for cash discount was made by the appellant, ii) the signatures of the customers in the delivery .....

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unt received by them. Clearly, the AO had made out a case and come to the conclusion after verifying the books of accounts, particularly cash book, ledger book and confirmations letters from the customers that the cash discount shown by the appellant in the books of accounts was not genuine and afterthought. In rebutting the finding of the AO, the Id. AR argued mainly on three counts i) the customers are from far off villages and prior to purchase of tractors, they have no bank facilities, and t .....

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of sale of the tractors to the customers are given below: Sr.No. Name of the Purchaser Cost of tractor & date of purchase Discount paid in cash Dates between discount paid 1. Rameshbhai Babarbhai Patel 504000/- 60000/- 29.4.2006 to 15.05.2006 2. Gamanbhai Maganbhai Choudhary 593000/-26.04.2006 75000/- 30/04/06 to 10.05.06 3. Janyantibhai Sakkarbhai Deshmuck 593000/- 10.05.2006 70500/- 12.05.06 to 21.05.06 4. Naginbhai Limjibhai Garasia 593000/-13.05.2006 68560/- 15.05.06 to 25.05.06 5. Dans .....

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00/- 20.07.06 to 28.07.06 12. Gajanand Tractor 322941/- 07.07.06 70,000/- 26.06.06 to 03.07.06 13. Muljibhai Bhimabhai Patel 501320/-08.07.06 50,000/- 10.07.06 to 20.07.06 14. Chimanbhai Zinabhai Patel 542920/- 29.06.06 70400/- 12.07.06 to 28.07.06 15. Pravinbhai Ramanbhai Mahala 583520/- 29.06.06 53100/- 18.07.06 to 29.07.06 16. Vijaybhai Dahyabhai Ahir 510860/- 04.07.06 70000/- 20.07.06 to 08.08.06 17. Vinodbhai Ranchodbhai Patel 432000/- 04.07.06 46350/- 26.07.06 to 01.08.06 18. Sudhirbhai Ba .....

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.09.06 to 28.09.06 25. Gamanbhai Maganbhai Choudhary 603520/- 25.08.06 60200/- 15.09.06 to 25.09.06 From the above table, it is crystal clear that the so called cash discount given to the customers were much after the sales were affected apart from in a couple of cases, a normal practice, discounts are offered to the customers by way of accessories and services. It is also fact that in few cases discounts are given in cash for some genuine cause. In the instant case, the appellant has not able t .....

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8.5% cash discount definitely not a viable business proposition. As the AO rightly observed that entry in ledger account do not tally with the cash book clearly indicates that the cash discount expenses was invented by the appellant much after the sales were affected. When the tractors were sold to the customers, they had already had bank accounts then why the appellant did not pay them in cheques the discount instead of paying in cash. The contention of the Id. AR that cash discounts are offere .....

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