TMI Blog2016 (10) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incurred by the assessee to be booked in the books of account of assessee. Accordingly, we are inclined to remit the issue to the file of AO to verify the books of accounts of assessee whether the Service Commission is debited when the sales made and if the 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 issue to the file of AO for fresh consideration. Disallowance u/s.14A - HELD THAT:- In this case the undisputed facts are that the 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 the Act from the tax liability and the same cannot be computed under the head income from other sources . The expenditure incurred to earn exempted income is not liable for deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee fled a Cross Objections in support of the order of Ld.CIT(A). Since issues 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 the sake of convenience. 2. The 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 the dealers, which is only a provision. 3. The facts of the issue are that the assessee claimed Service Commission in these assessment years as the expenditure, when the air conditioners were sold to the dealers. According to AO, the expenditure which is booked at the time of sale is only a provisional expenditure. The actual expenditure will accrue, only when the particular unit is sold by the dealer and installed at the customer s premises. There is no certainty that all the units sold to the dealer would in turn be sold to the customer within the same 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the dealers per the narration available in the Service Commission. Against the order of Ld.CIT(A), the Revenue is in appeal 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 Commission embedded to the sales. Whenever assessee makes the sales corresponding liability attached to the assessee to maintain air conditioners in a better condition of operations for a particular period and for which the assessee is providing free maintenance warranty, which involves the cost to be borne by the assessee for which the assessee is making the provision in the books of account of assessee. Further, he submitted 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 accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be lesser than the income itself. On some occasions, there could not even be any income though expenses are incurred towards earning the same. Even in such circumstances, the provisions of section 14A read with rule 8D were held to be applicable relying on the judgement of the Special Bench of ITAT, Delhi in M/s. Cheminvest Limited Vs. DCIT (ITA 2048/Del/2005) and by ITAT, Chennai and computed the disallowance as per the provisions of Rule 8D of I.T Rules. Accordingly, the AO disallowed 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 placing reliance on the judgement of Delhi High Court in M/s. Cheminvest Limited Vs. DCIT, Ld.CIT(A) allowed the appeal of assessee holding that since assessee is having no exempt income, there is no question of disallowance u/s.14A of the Act. Against this, the Revenue is in appeal before us. 7. We have heard both the parties and perused the material on record. The Hon ble Madras High Court in the case of CIT Vs. M. Ethurajan (273 ITR 95) considered this issue by following the judgement of Supreme Court in the case of CIT v. Rajendra Prasad Moody [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve no application to the facts 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 (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, Hon ble Karnataka High Court in the 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 the Act. Accordingly, this ground of the Revenue is allowed. 8. The 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 the sister concerns. 8.1 The facts of the case are that the assessee has paid discounts to various parties. This includes M/s ETA Star Appliances P Ltd, a related party who have received a discount. Since the paid up capital of the Company exceeds Rs. One Crore, transactions with such parties are covered u/s 297(1) of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Tribunal held that: 8. Heard both sides. Perused orders of lower authorities and the decision relied on. The Assessing Officer while completing the assessment disallowed trade discount allowed by the assessee to its sister concerns stating that assessee has violated the provisions of section 40A(2) of the Act. The Assessing Officer was of the opinion that since sister concerns are enjoying deduction 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 findings of the Assessing Officer and the submissions of the assessee and following the various High Court decisions including the decision of jurisdictional High Court in the 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 the market rate. Commissioner of Income Tax (Appeals) also held that Assessing Officer was in error in disallowing the trade discount under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertains to disallowance to an expenditure 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 is not in dispute that the subject matter of the claim is a Trade Discount and not an expenditure, clearly therefore there does 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 present 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 ₹ 5,04,03,180/- 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 Acid Slurry of ₹ 56,67,70,241/-, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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