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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri J.Sudhakar Reddy & Shri S.S.Godara
O R D E R
PER S.S.Godara, Judicial Member:
- This Revenue’s appeal for assessment year 2002-03 arises against the Commissioner of Income Tax (Appeals)-22, Kolkata’s order dated 27.03.2017 passed in case No.123/CIT(A)-22/02-0310-11/Kol, involving proceedings u/s 143(3) r.w.s. 251 r.w.s. 254 of the Income Tax Act, 1961; in short ‘the Act’.
The Revenue pleads the following substantive grounds in its instant appeal:- “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting Rs.3.85 crores routed through P&L A/c under the head dealers incentive disregarding the fact that the Assessing Officer's addition has been based on discrepancies, crystal clear as it looks, in terms of the supporting credit notes furnished by the assessee.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs.2.04 crores routed through balance sheet on account of Dealers incentive – this is the area of contention because the Assessment Year 2002-03 DCIT, Cir-1(1), Kol.. Vs M/s Exide Industries Ltd. Page 2 assessee could in no proceeding justify that this expense pertain to the assessment year in question.” Heard both the parties.
Case file suggests that instant lis is in the nature of consequential proceedings arising from the tribunal’s first round remand direction in decided on 20.04.2007. Learned co-ordinate bench had restored the impugned dealers incentive issue back to the Assessing Officer as follows:- “3. The assessee is a widely held domestic company engaged in the business of manufacture and sale of batteries. The assessee company made a provision in its books of accounts of a sum of Rs.3,85,00,000/- on account of incentive payable to its dealers. The company thereafter claimed an additional amount of Rs.2,04,21,638/- as deduction in computation filed along with the revised return. The assessee was asked to explain along with details of such claim. In this respect the assessee’s reply was as under : “the amount of Rs.2,04,21,638/-, as deduction in computation of taxable income for the A.Y. 2002-03 represents turnover discount/incentive paid or credited to dealers and distributors of the company based on the actual offtake of batteries during the financial year 2001-02. As per the marketing policy of the company dealers and distributors of the company are entitled turnover discount termed as ‘dealer incentive’ based on the actual purchase of batteries from the company subject to some minimum offtake requirements. There are various types of schemes at various point of time and at various regions depending on the marketing policies of the company. Offtakes of individual dealers/distributors are calculated after closing of financial year and credited to them with the incentive/turnover discount entitlement as per policy of the assessee in following assessment year. As at the end of financial year 2001-02 (i.e. as at 31st March, 2002) an amount of Rs.3,85,00,000/- remained as liability on account of trade incentive/turnover discount payable to dealers and distributors of the company. However, on actual calculation the actual incentive credited to the dealers and distributors of the company was Rs.5,89,21,638/- for the financial year 2001-02. The differential amount of Rs.2,04,21,638/- (Rs.5,89,21,638/-) was charged to the profit and Loss account for the financial year 2002-03, which actually related to the financial year 2001-02.”
4. However, the Assessing Officer was of the view that the assessee has not furnished the details to show that the actual amount of Rs.5,59,21,638/- pertains to the assessment year 2002-03. But he allowed the amount provided in the accounts amounting to Rs.3,85,00,000/- and the additional claim of Rs.2,04,21,638/- as per revised return was disallowed.
5. Aggrieved by this order of the Assessing Officer the assessee went in appeal before the first appellate authority who enhanced the income of the assessee by disallowing Assessment Year 2002-03 DCIT, Cir-1(1), Kol.. Vs M/s Exide Industries Ltd. Page 3 the amount of Rs.3,85,00,000/-, relying on the decision of Hon’ble Supreme Court in the case of Indian Molasses –Vs- CIT reported in 37 ITR 66 which has been allowed by the Assessing Officer. Thus, the total disallowance after the order of the Ld. CIT(A) stands at Rs.5,89,21,638/-. The grounds on which the entire dealers’ incentive was disallowed by the Ld. CIT(A) are as under : “(i) The entire amount of dealer’s incentive claimed by the assessee lacks the characteristics of the term ‘expenditure’. (ii) The dealers do not have any knowledge about the amount credited to them since the assessee had not credited the individual accounts of the dealers. (iii) The appellant had not issued any credit notes on account of such incentives. (iv) The most important condition for a claim to be eligible for deduction is that it should have gone out of the pocket of the assessee irretrievably and that the appellant had not parted with a single rupee.” The case laws relied on by the assessee company were distinguished by the Ld. CIT(A) while enhancing the income of the assessee. .
Aggrieved by this order of the Ld. CIT(A) now the assessee is in appeal before us.
At the time of hearing the Ld. Counsel for the assessee reiterated the stand taken by him before the lower authorities. He further submitted that the Assessing Officer was not correct in stating that the details regarding this claim were not filed before him. Referring to page nos. 7, 8, 11 to 159 of the paper book the Ld. Counsel for the assessee submits that the total amount of credit notes issued in relation to the commission pertaining to the F.Y. were before the Assessing Officer. The assessee also submitted 100 credit notes (pates 160 to 260 of the paper book) which showed the total sales for the year against which the assessee ascertained this commission. These details were also placed before the Ld. CIT(A) but both the Assessing Officer as well as the Ld. CIT(A) did not take any cognizance of these details. Coming to the Ld. CIT(A)’s order the Ld. Counsel for the assessee submitted that the decision of Hon’ble Supreme Court in the case of Indian Molasses –Vs- CIT relied on by the Ld. CIT(A) is in no way different from the contentions which the assessee had placed before him. The Apex Court has defined the term ‘expenditure’ as what is ‘paid out or away’ and is something which is gone.irretrievably. In the instant case too the amount of dealer’s incentive had been provided in the books during the F.Y. 2001-02 and had been paid out in the immediately next year. In the case of Indian Molasses – Vs- CIT (supra) the issue was of contingent liability but in the instant case the liability had crystalised as soon as the sales had been affected by the dealers but could not be correctly quantifies due to lack of actual data. Therefore, the reliance placed by the Ld. CIT(A) on this case is misplaced. The second and third grounds on which the Ld. CIT(A) has made this disallowance are that the assessee did not credit the individual accounts of the dealers and did not issue credit notes. In this connection, the Ld. Counsel’s submissions were that since quantification of the actual incentives payable to each dealer was not possible as on 31st March, 2002 the individual accounts of the dealers could not be credited. However, all the individual Assessment Year 2002-03 DCIT, Cir-1(1), Kol.. Vs M/s Exide Industries Ltd. Page 4 accounts of the dealers were credited with the actual incentives payable to them for the sales affected by them during the F.Y. 2001-02 in the immediately next F.Y. 2002- 03 and the entire list of incentives amounting to Rs.5.89 crores have been furnished to the Assessing Officer as well as the Ld. CIT(A). The last ground for making this disallowance by the Ld. CIT(A) was that the assessee had not parted with the money. According to the Ld. Counsel for the assessee this ground of Ld. CIT(A) is not in accordance with the mercantile system of accounting. After the introduction of section 145 of the Act all companies are required to maintain their accounts on accrual basis. Once an income or expenditure has accrued it has to be taken into consideration while computing the total income. In the instant case there is no doubt that the dealer’s incentives have accrued since the sales had been affected by the dealers within the F.Y. 2001-02 and, therefore, there remains no doubt that the same should be taken into consideration while computing the total income. It is settled principle that if the liability has accrued and arisen the same should be allowed in that year irrespective of the fact that such expenditure is actually accounted and discharged in the subsequent year. The general rule is that the deduction can be permitted in respect of those expenses or losses which have accrued in the relevant accounting year. In making these submissions, he relied on the following decisions: “i) CIT –Vs- Govardhan Lal (1968) 69 ITR 675 (SC); ii) Bharat Earth Movers –Vs- CIT 245 ITR 428 (SC); iii) Calcutta Co. Ltd. –Vs- CIT 37 ITR 1 (SC); iv) CIT –Vs- Swadeshi Mining Manufacturing Company Ltd. 112 ITR 276 (Cal) and v) Hukumchand Jute & Industries Ltd. –Vs- CIT 241 ITR 517 (Cal).
Concluding his arguments and further making reliance on a decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. –Vs- CIT reported in 82 ITR 363 (SC) wherein it was held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive in the matter, the Ld. Counsel for the assessee submitted that if a particular expenditure is allowable as it is in the case of the assessee the same cannot be disallowed merely because the assessee has not accounted the expenditure or had made a different treatment in the accounts.
The Ld. Departmental Representative, on the other hand, supported the orders of the lower authorities and while placing reliance on Ld. CIT(A)’s order submitted that since the assessee has failed to file copy of incentive scheme either before the Assessing Officer or before the Ld. CIT(A) the claim of the assessee is without any basis and deserves to be rejected. To verify the fact whether assessee has filed copy of the incentive scheme, the records of Ld. CIT(A) were called for and found that assessee did submit the copy of credit policy, incentive scheme and deferred discount policy for the F.Y. 2001-02 and the same was available with him. Copies of which are also available at pages 369 to 391 of the paper book filed by the assessee before us. At this stage, the argument of Ld. Departmental Representative was that since this incentive scheme was not before the Assessing Officer the matter should be restored back to the file of the Assessing Officer to ascertain whether the incentive claimed by the assessee is as per the scheme or not. In reply, the Ld. Counsel for the assessee Assessment Year 2002-03 DCIT, Cir-1(1), Kol.. Vs M/s Exide Industries Ltd. Page 5 submitted that he has no objection if the matter is restored back only for verifying the quantification of the incentive claimed by the assessee.
Heard both the parties, perused the records relied on by the Ld. Counsel for the assessee in the form of credit notes, the incentive scheme and the case laws relied on by both the parties. We find that there is no dispute about the fact that commission pertains to the sales affected during the year under appeal and since the Assessing Officer has accepted the sales made by the assessee during the year the commission on sales made through agents had also become accrued and due to the dealers. Simply because the assessee could not estimate the amount correctly and had provided a lower figure in its P&L Account and differential figure was ascertained at a later stage and provided in the subsequent year the allowable deduction cannot be denied to the assessee. In our considered view the amount had accrued during the year under appeal and the assessee had rightly claimed the said amount, the same should have been allowed by the Assessing Officer. This view finds support from the judicial principles laid down by the various High Courts and Hon’ble Supreme Court in the cases relied on by the Ld. Counsel for the assessee. However, since the incentive scheme was not before the Assessing Officer, we deem it proper that to verify whether the assessee’s claim is as per the scheme or not i.e. for quantification of the incentive claimed by the assessee, the matter is restored back to the Assessing Officer. Therefore, this ground is disposed of accordingly.”
The Assessing Officer took up consequential proceedings. The assessee placed on record its dealers incentive scheme dated 07.06.2001 in compliance to above remand directions. It explained that said dealers incentive scheme of periodical incentive required monthly / quarterly targets and credit notes @ 2% on the value net of sales tax and other levies as well as 15 per piece for motor cycle batteries in former and annual target incentive for automotive batteries with credit notes @ 1% of the value net of sales tax and 15 per battery for motor cycle in latter category; respectively.
The assessee then filed its incentive calculation details for total seven regions in the country. The Assessing Officer issued sec. 131 notice(s) assessee’s dealers. The Assessing Officer’s consequential assessment order makes it clear that all the said parties confirmed assessee’s credit notes barring a few small amounts of matching issues. The Assessing Officer thereafter invoked the impugned disallowance after quoting hon'ble apex court’s decision in Indian Molasses vs. CIT 37 ITR 66 (SC). He held that the impugned liability had neither accrued nor crystallized during the relevant previous year.
Assessment Year 2002-03 DCIT, Cir-1(1), Kol.. Vs M/s Exide Industries Ltd. Page 6 6. The CIT(A) has delete the impugned dealers incentive disallowance vide its following discussion:- “06. DECISION:
1. 1. I have carefully gone through the submissions filed by the appellant and the observation of the Ld. AO in the order. I find that in terms of the direction of the Hon'ble ITAT “A” AO was required to verify the quantification of the incentive payable to dealers with the incentive scheme.
2. The Hon'ble ITAT has decided the issue on merits by holding that “Simply because the assessee could not estimate the amount correctly and had provided a lower figure in its P&L account and differential figure was ascertained at a later stage and provided in the subsequent year the allowable deduction cannot be denied to the assessee. In our considered view the amount had accrued during the year under appeal and the assessee had rightly claimed the said amount, the same should have been allowed by the Assessing Officer.” Hence, the disallowance of the same by the Ld. AO on merits tantamount to gross violation of the decision of the Hon'ble ITAT and the same is not permissible. In view of the above, the disallowance of dealers’ incentive by the Ld. AO on the ground that the same has not crystallized during the relevant year is not sustainable since the same is against the principles which haves been decided by the Hon'ble ITAT.
3. It is an undisputed fact that the appellant had filed incentive scheme, computation of incentive on sample basis for seven regions and numerous credit notes before the Ld. AO verification, in terms of the direction of the Hon'ble ITAT. The Ld. ARs have filed the above documents in this forum also and the same are on record. The Ld. AR explained in detail how the incentive has been worked out. I find that the details of computation of incentive are mentioned in the credit note itself, and are amenable for verification. A few of these were test checked on a sample basis also, and are found to be in order. Therefore, it is seen that the appellant had computed incentives in terms of the incentive scheme and as such the same is allowable in terms of the decision of the Hon'ble ITAT, Finally, in the order, the Ld. AO once again placed reliance on the decision of the Hon'ble Supreme Court in the case of Indian Molasses Co Private Ltd v CIT (supra) and rejected the claim of the appellant. In this connection, it is to be mentioned that the Hon'ble ITT has already held that the decision of the Hon'ble Apex Court in the case of Indian Molasses Co Private Ltd was not applicable to the fact of the case, and therefore the reliance placed by the Ld. AO on the said decision of the Hon'ble Apex Court would tantamount to gross violation of the decision and directions of the Hon'ble ITAT. Accordingly, I direct the Ld. AO to delete the disallowance of Rs.5.89 crores. With such view of the matter, Ground No.1 taken by the appellant is allowed.”
7. We have given our thoughtful consideration to rival contentions. Mr. Singh vehemently contends during the course of hearing that the CIT(A) has erred in law and on facts in deleting the impugned dealers incentive disallowance / addition despite the fact that the same was found to have neither accrued nor crystallized during the relevant previous year. He quotes hon'ble apex court’s decision (supra) in support of the Assessing Officer’s action during the course of hearing. Learned Departmental