ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, KURNOOL vs. SREE RAYALASEEMA GALAXY PROJECTS PVT LTD , KURNOOL

The Ld.CIT(A) erred in admitting the appeal of the assessee after condoning delay of 1159 days. Condonation of delay is not warranted when assessee takes a conscious decision not to file appeal against the assessment order as held in the case of S.S Builders Vs ITO 2010-TIOL- 714-ITAT-MUM.

Any other additional ground that may be urged at the time of hearing.”

The brief facts of the case are that the assessee company is engaged in the business of manufacturing and selling of aluminium sulphate. Assessee filed its return of income for the assessment year 2010-11 on 09/01/2010, admitting current year loss of Rs.12,61,393/- under the normal provisions of the Act. The assessee had also admitted income as per the provisions of section 115JB of the Act had paid taxes thereon. During the course of assessment proceedings, the AO noticed that the assessee had made export sales of its products through its group company, Sree Rayalaseema Hi Strength Hypo Limited (SRHHL). The AO further noted that, as per the ledger account of SRHHL in the books of accounts of the assessee, the assessee has allowed a trade discount of Rs.3,99,77,971/- was allowed and debited to the profit and loss account. The AO called upon the assessee to explain the trade discount allowed to SRHHL by way of a debit note dated 31/10/2010 with necessary evidence and reasons for allowing such trade discount.

The AO, after considering the submissions of the assessee and also taken note of relevant facts, observed that the claim of the trade discount of Rs.3,99,77,971/- by way of a debit note dated 31/10/2010 was not a genuine trade discount allowed to customers as a trade practice in the normal course of business but was an entry made in the books of accounts to reduce the sale proceeds and thereby reduce its profit in the year under consideration. Therefore, the AO rejected the explanation of the assessee and made an addition of Rs.3,99,77,971/- towards the disallowance of the trade discount. The Assessing Officer had also invoked the provisions of section 40(A)(2)(b) of the Act and observed that the trade discount allowed by the assessee at 25% of the total sales to SRHHL was excessive and unreasonable and thus, allowed a trade discount of Rs.50 lakhs against the claim of Rs.3,99,77,971/- disallowing the balance amount of Rs.3,49,77,971 under section 40(A)(2)(b) of the Act.

Aggrieved by the said appeal, the revenue is in appeal before us.

The Ld.DR, Ms. Sheetal Sarin, has submitted that the ld.CIT(A) erred in admitting the appeal of the assessee for condonation of delay of 1159 days without assigning any reason as to how the reasons given by the assessee itself comes under reasonable cause for condonation of the delay. The ld.DR further submitted that the Ld.CIT(A) erred in admitting the appeal after condoning the delay, even though the reasons given by the appellant does not fall under reasonable cause. Referring to the additions made by the AO towards disallowance of trade discount, submitted that the Ld.CIT(A) erred in not considering the fact that generally, trade discounts are granted by deduction in invoice only and not by way of allowing trade discount at the year-end by passing journal entries. Further, the customer SRHHL had not reflected the alleged trade discount alleged by the assessee in its books of accounts for the assessment year 2010-11, which is further evident from the fact that the appellant itself has reversed the trade discount in the subsequent financial year 2010-11, relevant to assessment year 2011-12 and from the above, it is clear that the assessee has devised a method to reduce its tax liability for the assessment year 2010-11.

The ld.DR further referring to a chart enclosed in her written submissions dated 26/06/2014, submitted that it is not a case of tax neutrality as canvassed by the Ld.CIT(A). If we go by the income declared by the assessee and the income computed by the AO for the assessment years 2010-11 and 2011-12, the assessee has paid less tax in AY 2010-11, which is evident from the facts and figures brought out in the said chart. Therefore, she submitted that the Ld.CIT(A) erred in deleting the additions made by the AO without appreciating the relevant facts, and thus, the order of the Ld.CIT(A) should be set aside and the additions made by the AO should be sustained.

The learned counsel for the assessee, Shri P. Murali Mohan Rao, C.A., on the other hand, supporting the order of the Ld.CIT(A) submitted that what needs to be considered to assess a particular income in a particular assessment year is the rate of tax, but not the amount of tax when it comes to the theory of tax neutrality. This legal aspect has been clarified by the Hon'ble Supreme Court in the case of CIT Vs. Excel Industries Limited and CIT Vs. Nagri Mills Company Limited. He further referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Skyline Great Hills, submitted that when the appellant itself has offered to tax a particular income, the same cannot be taxed in another year because there is no provision under the Act to tax a particular income in both the assessment years. The learned counsel for the assessee, further referring to the arguments in light of the order passed by the AO under section 154 of the Act for assessment year 2011-12 dated 13/12/2015, submitted that the appeal for assessment year 2011-12 is not before us and the reason for which the AO passed the order under section 154 is also not relevant. The only point that needs to be considered in the present case is whether the additions made by the AO towards the disallowance of the trade discount is sustainable in law when the appellant itself has reversed the said trade discount in the subsequent assessment years and paid taxes. If we go by the ratio laid down in the cases referred to above, it is undisputedly clear that when the rate of tax is common for both the assessment years, just because the income is assessed at different assessment years, no addition can be made in another assessment year. Therefore, he submitted that the order passed by the Ld.CIT(A) should be upheld.

We have heard both the parties, perused the materials on record and gone through the orders of various authorities below along with case laws cited by both the parties on the principle of tax neutrality and tax liability of income. The sole question that arises for our consideration in the given facts and circumstances of the case is whether the trade discount claimed to have been allowed by the appellant to customer SRHHL is a genuine trade discount in the normal course of business or an entry passed in the books of accounts to reduce the tax liability. Admittedly, if we go by the general practice in trade, trade discounts are allowed in the invoices only, which is more so for the reason that indirect tax is not paid on the component of trade discount. If we go by the general practice followed in the industry and the method followed by the assessee to allocate trade discount to SRHHL, it appears that the claim of the assessee towards trade discount allowed to SRHHL is appears to be not backed by relevant evidences. The appellant claims to have allowed a trade discount of Rs.3,99,77,971/- by way of a debit note dated 31/03/2010 and said trade discount claimed to have been allowed on the basis of total sales made to SRHHL. We further noted that as claimed by the assessee before the AO and before the Ld.CIT(A) the customer SRHHL has not responded to the credit note, and the reason given by the assessee for not accepting the credit note issued by the other party was that SRHHL is a listed company and has closed their books of accounts on 28/05/2010. Because of the closure of accounts, the customer has not accepted the trade discount allowed by the assessee and not accounted for it in their books of accounts. In our considered opinion, the arguments advanced by the assessee cannot be accepted for the simple reason that no business person will ever allow a trade discount to any customer unilaterally unless the other party seeks a discount from the seller or take into account in its books of account. Secondly, assuming for a moment, the arguments of the assessee that SRHHL has closed the books of accounts by the time the appellant issued the credit note but there is no problem for the other party to account for the said trade discount in the subsequent financial year and account for it in their books of accounts. Therefore, the reasons given by the appellant to debit the trade discount for assessment year 2010-11 and subsequent reversal for assessment year 2011- 12 appears to be an afterthought to reduce sales and consequent profits for AY 2010-11, but nothing else. Therefore, we are of the considered opinion that merely because the appellant has reversed the trade discount in the subsequent assessment year, the AO is not precluded from examining and disallowing the trade discount claimed by the assessee for the assessment year 2010-11 in light of relevant evidence. If we go by the evidence filed by the assessee to justify the allowability to SRHHL, in our considered opinion, there is no error in the reasons given by the AO to allege that the assessee has passed entries in the books of accounts and reduced sales turnover and, thereby, tax liability, but not allowed a genuine trade discount to customers. Therefore, we are of the considered opinion that the claim of the assessee towards the trade discount allowed to SRHHL appears to be not genuine and not backed by relevant evidence.

Be that as it may, what is important to see is the genuineness of the trade discount claimed to have been allowed by the assessee. Going by the evidence filed by the assessee, it appears that the trade discount to SRHHL is not supported by necessary evidence, and this fact is further strengthened by the reversal of the trade discount in the subsequent financial years. The AO had also given reasons for not accepting the argument of the assessee in the context of tax neutrality and had held that, as claimed by the assessee, it is not a case of tax neutrality but a case of reducing payment of tax under normal provisions of the Act by disallowing the trade discount for AY 2010-11. This is further fortified by the computation of tax liability furnished by the learned AR during the course of appellate proceedings for assessment years 2010-11 and 2011-12, where she has demonstrated that the assessee has paid less tax for assessment year 2010-11 by passing the discount noting in the books of accounts. The tax calculation for both the assessment years 2010-11 and 2011-12 was if the trade discount is not factored in the assessment year 2010-11 then the table taxes under the normal provisions would be Rs.1,33,63,730/- and under Section 115JB it would be Rs.62,28,803/- and whereas if the trade discount is factored in assessment year 2011-12, then the tax payable would be nil under normal provisions and also under section 115 JB of the Act. In view of this, it cannot be said that the claim of trade discount in two different years will not make any difference.

In the result, the appeal of Revenue is allowed.

In so far as the appeal of assessee is concerned, the ld.AR submitted that he wishes to not press the appeal. Per contra, Revenue reported no objection. Heard from both sides and in view of the submission of ld.AR for not pressing the appeal, we dismiss the appeal as withdrawn.

In the result, the appeal of assessee is dismissed as withdrawn.

In the combined result, the appeal of Revenue is allowed and the appeal of assessee is dismissed as withdrawn.