2018 (2) TMI 504 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decision on Trade Discounts and TDS; Appeals Partly Allowed

The Tribunal upheld the CIT(A)'s decision in allowing commission expenses as trade discounts, deleting additions under section 40(a)(ia) for non-deduction ... Treatment of trade and cash discounts - commission or brokerage under section 194H - deductibility under section 37(1) - provision for doubtful debts and computation of book profit under section 115JB - admission of fresh evidence and Rule 46A - remand to the Assessing Officer for fresh adjudicationTreatment of trade and cash discounts - commission or brokerage under section 194H - deductibility under section 37(1) - Whether cash and trade discounts given to customers are commission liable to TDS under section 194H or are discounts on sale deductible under section 37(1). - HELD THAT: - The Tribunal accepted the factual finding that sales to dealers were on a principal-to-principal basis and relied on the explanatory scope of section 194H which requires a payment for services (including services in the course of buying or selling) to qualify as commission or brokerage. Following the ratio of the Hon'ble Supreme Court in Ahmadabad Stamp Vendors Association that discounts for bulk purchase are cash/trade discounts and not commission, the Tribunal held that the discounts in question were part of the sale transaction and not payments for services. Consequently the provisions of section 194H did not apply and the AO's disallowance under section 40(a)(ia) was not justified. [Paras 8]Discounts treated as trade/cash discounts on sale and allowable as business expenditure; disallowance under section 40(a)(ia)/section 194H dismissed.Deductibility under section 37(1) - Whether amounts recorded as 'damages' (costs on returned/rejected goods) are allowable business deductions under section 37(1) or liable for disallowance in full. - HELD THAT: - The assessee produced details and sample supporting documents showing that returned goods were repaired or scrapped and that costs (freight, duties, taxes, cost of scrapping) were debited to the damages account. The Tribunal observed that the AO had not pointed to any defect in those submissions and had not shown that the expenses were incurred otherwise than for business. On that basis the Tribunal held that the costs were incurred in relation to business and eligible for deduction, overturning the AO's blanket disallowance and allowing the assessee's claim. [Paras 12, 15, 16]Expenses on damaged/returned goods are business expenses deductible under section 37(1); the AO's disallowance is set aside and the assessee's appeals on this point are allowed.Provision for doubtful debts and computation of book profit under section 115JB - admission of fresh evidence and Rule 46A - remand to the Assessing Officer for fresh adjudication - Whether the amount of provision for doubtful debts written back (claimed in computing book profit under section 115JB) should be allowed in full, and whether documents admitted first before the CIT(A) in contravention of Rule 46A can be entertained on appeal. - HELD THAT: - The Tribunal found that the CIT(A) had admitted fresh evidence in breach of Rule 46A and that details of provisions created in earlier years were not supplied to the AO during assessment. Given the procedural lapse and the need for factual verification of past additions and accounting treatment, the Tribunal concluded that the issue requires fresh examination by the AO with an opportunity to the assessee to produce supporting material. Both parties agreed remand was appropriate. [Paras 18, 20]Issue remitted to the Assessing Officer for fresh adjudication in accordance with law and after giving the assessee reasonable opportunity; appellate relief on this point allowed for statistical purposes.Final Conclusion: The Tribunal (ITAT Kolkata) held that cash and trade discounts given to dealers are discounts on sale (not commission) and are allowable under section 37(1), setting aside the disallowance under section 40(a)(ia)/section 194H; it allowed the assessee's claims for expenses on damaged/returned goods as business deductions; and it remitted the claim relating to provision for doubtful debts/book profit under section 115JB to the Assessing Officer for fresh consideration because the CIT(A) had admitted fresh evidence in contravention of Rule 46A. Issues Involved:1. Allowance of commission expenses as trade discount.2. Deletion of addition under section 40(a)(ia) for non-deduction of TDS on commission payment under section 194H.3. Restriction of disallowance on expenses of damaged goods.4. Restriction of provision for doubtful debts for computing income under section 115JB.Detailed Analysis:1. Allowance of Commission Expenses as Trade Discount:The Revenue contended that the CIT(A) erred in allowing commission expenses amounting to Rs. 100,66,944/- as trade discount, arguing that these discounts were in the nature of commission and thus subject to TDS under section 194H. The assessee maintained that the discounts were offered on a principal-to-principal basis and not as commission. The CIT(A) found in favor of the assessee, citing the Supreme Court judgment in CIT vs. Ahmedabad Stamp Vendors Association, which held that discounts for bulk purchases do not constitute commission under section 194H. The Tribunal upheld the CIT(A)'s decision, affirming that the discounts were not commission and thus not subject to TDS.2. Deletion of Addition under Section 40(a)(ia) for Non-Deduction of TDS:The AO had disallowed Rs. 100,66,944/- under section 40(a)(ia) for non-deduction of TDS on commission payments. The CIT(A) deleted this addition, reasoning that the payments were trade discounts and not commissions, thus not requiring TDS under section 194H. The Tribunal agreed with the CIT(A), referencing the Supreme Court's ruling that discounts for bulk purchases are not commissions and thus not subject to TDS under section 194H.3. Restriction of Disallowance on Expenses of Damaged Goods:The AO disallowed Rs. 87,35,561/- claimed by the assessee for damaged goods, citing lack of evidence. The CIT(A) restricted this disallowance to 10%, allowing Rs. 8,72,556/- as reasonable business expenses. The Tribunal found that the expenses were directly related to the business and should be allowed under section 37(1). It dismissed the Revenue's appeal and allowed the assessee's appeal, holding that the full amount claimed for damaged goods was justified.4. Restriction of Provision for Doubtful Debts for Computing Income Under Section 115JB:The AO disallowed Rs. 1,16,27,000/- claimed by the assessee as provision for doubtful debts under section 115JB, citing lack of supporting details. The CIT(A) allowed Rs. 93,46,000/- based on the assessee's past provisions. The Tribunal remanded the issue back to the AO for fresh examination, as the CIT(A) had admitted new evidence without following Rule 46A procedures. The Tribunal instructed the AO to re-examine the details and decide according to the law.Separate Judgments:- The Tribunal delivered a consolidated judgment for all cross-appeals due to identical facts and circumstances.- For ITA No. 2758/Kol/2013 (AY 09-10), the Tribunal upheld the CIT(A)'s decision on trade discounts and damaged goods but remanded the provision for doubtful debts issue for fresh examination.- For ITA No. 1895/Kol/2014 (AY 10-11), the Tribunal followed the same reasoning as in ITA No. 2758/Kol/2013.- The Tribunal allowed the assessee's appeals in ITA No. 688/Kol/2014 (AY 08-09) and ITA No. 1718/Kol/2014 (AY 10-11) based on the same grounds.- The Tribunal dismissed the Revenue's appeal in ITA No. 1325/Kol/2014 (AY 08-09) on the issue of damaged goods expenses.Summary:- Revenue's appeals in ITA No. 2758/Kol/2013 and ITA No. 1895/Kol/2014 were partly allowed for statistical purposes.- Assessee's appeals in ITA No. 2553/Kol/2013, ITA No. 688/Kol/2014, and ITA No. 1718/Kol/2014 were allowed.- Revenue's appeal in ITA No. 1325/Kol/2014 was dismissed.Order Pronounced:The order was pronounced in the open court on 02/02/2018.