Tribunal remits issues on Service Commission, Trade Discount; Appeals allowed under Income Tax Act

The Tribunal remitted the issue of the deletion of addition towards Service Commission yet to be paid to dealers to the Assessing Officer to verify if the Service Commission was debited when sales were made. The appeal under Section 14A of the Income Tax Act was allowed, as the assessee had no exempt income. The deletion of disallowance of trade discount given to sister concerns was remitted to the AO to determine if the trade discount was given in the sales bills or separately. The Revenue's appeals were partly allowed for statistical purposes, and the Cross Objections were dismissed.

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Issues Involved:
1. Deletion of addition towards Service Commission yet to be paid to dealers.
2. Deletion of disallowance under Section 14A of the Income Tax Act.
3. Deletion of disallowance of trade discount given to sister concerns.

Detailed Analysis:

1. Deletion of Addition towards Service Commission Yet to Be Paid to Dealers:

The assessee claimed Service Commission as an expenditure when air conditioners were sold to dealers. The Assessing Officer (AO) disallowed this provision, arguing that the expenditure would only accrue when the units were sold by the dealer and installed at the customer's premises. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claim, noting that the liability was created at the event of sale, making it a present obligation. The CIT(A) observed that the provision was created scientifically and reliably under the matching concept at the time of sale, and the liability was continuously discharged by issuing credit notes to dealers. The Tribunal remitted the issue to the AO to verify if the Service Commission was debited when sales were made, and if so, the claim should be allowed.

2. Deletion of Disallowance under Section 14A of the Income Tax Act:

The AO found that the assessee held investments capable of generating tax-free income and disallowed an amount under Section 14A, arguing that expenses must be divided between exempt and taxable streams of income. The CIT(A) allowed the appeal, relying on the Delhi High Court judgment in M/s. Cheminvest Limited Vs. DCIT, holding that since the assessee had no exempt income, disallowance under Section 14A was not applicable. The Tribunal, referencing the Madras High Court and Karnataka High Court judgments, concluded that the expenditure incurred to earn exempt income is not deductible, thus allowing the Revenue's ground.

3. Deletion of Disallowance of Trade Discount Given to Sister Concerns:

The AO disallowed trade discounts given to sister concerns, citing the lack of approval from the Central Government as required under Section 297(1) of the Companies Act, 1956. The CIT(A) allowed the appeal, noting that the payment of trade discount did not attract the provisions of Section 40A(2) of the Income Tax Act and was not in violation of the Companies Act. The Tribunal, referencing the decision in DCIT Vs. M/s. Power Soaps P. Ltd., remitted the issue to the AO to verify whether the trade discount was given in the sales bills or as a separate credit after the sales. If the latter, Section 40A(2) would apply.

Cross Objections:

The Cross Objections filed by the assessee were supportive of the CIT(A)'s order and did not require separate adjudication.

Conclusion:

The appeals of the Revenue were partly allowed for statistical purposes, and all the Cross Objections raised by the assessee were dismissed. The order was pronounced on 05th October 2016, at Chennai.

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