ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, KURNOOL vs. SREE RAYALASEEMA GALAXY PROJECTS PVT LTD , KURNOOL
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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” , HYDERABAD
Before: SHRI LALIET KUMAR, HON’BLE & SHRI G. MANJUNATHA, HON’BLE
आयकर अपीलीय अधिकरण, हैदराबाद पीठ में IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B” , HYDERABAD BEFORE SHRI LALIET KUMAR, HON’BLE JUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER ITA No.615/Hyd/2015 Assessment Year: 2010-11 Sree Rayalaseema Galaxy Vs. The Income Tax Officer, Ward – 1, Projects Pvt. Limited, Kurnool. Flat No.40-304, Bhagyanagagar, Kurnool – 518004. PAN : AAECS1589H (Appellant) (Respondent) ITA No.1763/Hyd/2018 Assessment Year : 2010-11 The Assistant Commissioner of Sree Rayalaseema Galaxy Income Tax, Circle – 1, Projects Pvt. Limited, Kurnool. 40-304, Bhagyanagagar, Kurnool – 518004. PAN : AAECS1589H (Cross Applicant) (Respondent/Assessee) Assessee by: Shri P. Murali Mohan Rao, C.A. Revenue by: Ms. Sheetal Sarin, Sr.AR Date of hearing: 22.07.2024 Date of pronouncement: 25.07.2024
O R D E R PER BENCH :
These two appeals filed by the assessee, as well as the Revenue are directed against the separate orders passed by the Commissioner of Income Tax (Appeals)-, Kurnool dated 25.02.2015 and 18.06.2018 and pertains to assessment year 2010-11.
2.1 The grounds raised by the Revenue reads as under :
“1. The order of the Learned CIT(Appeals) is erroneous both on facts and in law. 2. 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. 3. The Ld.CIT(A) erred in admitting the appeal of the assessee after condoning delay as the assessee filed to prove beyond the shadow of doubt that the assessee was diligent and was not guilty of negligence whatsoever as pronounced by the Hon'ble ITAT, Hyderabad in the case of T.Kishan, Secunderabad Vs ACIT, Central Circle-1, Hyd [2012] 23 Taxmann.com 383 (Hyd). 4. The Ld.CIT(A) erred on facts and in law by directing the AO to delete the trade discount pertaining to AY 2010-11 and to treat the same in AY 2011-12 thereby violating the matching of revenue and expenditure principle and accounting time period principle. The Ld.CIT(A) failed to appreciate the fact that the income to be assessed in the hands of right person and in the right year. Tax neutrality plays no role in income Tax Assessment as held in the case of CIT Vs Ch.Atchaiah (SC) 218 ITR 239. 5. Any other additional ground that may be urged at the time of hearing.”
2.2 The additional grounds raised by the Revenue reads as under :
“6. Whether the Ld. CIT(A), while deleting the disallowance of trade discount, erred in not considering that trade discounts are granted by way of deduction in invoice value only and never appear in the books of accounts? 7. Whether the Ld. CIT(A) erred in not considering the fact that the customer, SRHHL had not reflected the alleged trade discount allowed in its books for A.Y. 2009-10? 8. Whether the Ld. CIT(A) failed to appreciate that there was sufficient time available to the assessee to reconcile this transaction, by virtue of the fact that the accounts of SRHHL was finalized on 28-05-2010 and that of the assessee was finalized on 31-08-2010? 9. Whether the Ld. CIT(A) erred in concluding that the addition was tax neutral, when the fact is that, because of the entry of trade discount, the assessee paid taxes as per provisions of 115JB which is far lesser than the normal provisions? 10. Whether the Ld. CIT(A) failed to appreciate that the entry of trade discount is an after thought, given the fact that, the entry was reversed immediately the next year, i.e. A.Y. 2011-12? 11. Assuming but not admitting that the trade discount was an allowable deduction, such deduction, being 25% of sales reported is excessive and unreasonable and hence should be restricted to Rs. 50,00,000/-?
2.3. The assessee has raised the following grounds in the appeal filed by it : “1. The order of the CIT(A) passed u/s 250 of the Income Of the Income tax Act, 1961 (“the Act”), 1961 dated 25.02.2015 is contrary to facts and law. 2. On the facts and circumstances of the case, the CIT(A) erred in confirming the order of the Income Tax Officer on the ground that granting and or rejecting the claim u/s 10B cannot be an issue for consideration u/s 154 of the Act.
On the facts and circumstances of the case, the CIT(A) failed to direct the Income Tax Officer to examine the relief u/s 10B of the Act arising from withdrawal of a claim for expenditure which enhanced the returned income through relevant documents like CA certificate as required by the statute were filed in the course of assessment. 4. On the facts and circumstances of the case, the CIT(A) also erred in confirming that relief u/s 10B of the Act cannot be allowed as taxpayer neither claimed the benefit in the return of income nor filed revised return of income.”
2.4. Firstly, we will take the appeal of Revenue in ITA No.1763/Hyd/2018 for A.Y. 2010-11.
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.
3.1. In response, the assessee submitted that the company has provided a trade discount on the basis of total quantity of the product purchased by the other party and also passed necessary entries in the books of accounts on 31/10/2010. However, the trade discount allowed by the assessee was not considered by the customer, and thus, the assessee has reversed the trade discount allowed in the subsequent financial year 2010-11, relevant to the assessment year 2011-12, and credited it to the profit and loss account. Since the assessee had already reversed the trade discount allowed and debited it to the profit and loss account in the subsequent financial year, and said reversal is a tax-neutral, the trade discount allowed to the customers and debited to the profit and loss account should be allowed.
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.
Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A) and such appeal has been filed with a delay of 1159 days. The assessee explained the reasons for the delay in filing the appeal before the CIT(A) and as per the reasons given by the assessee, it was exploring alternative remedies available under the Act by filing an application under section 154 of the Act and the same was refused by the Assessing Officer. Further, the assessee has filed an appeal against the order passed by the Assessing Officer and the same was disposed of by the department. Therefore, the counsel has advised to file an appeal against the order passed under section 143(3) and thus, the appellant has filed the present appeal with a delay of 1159 days. The appellant has also challenged the additions made by the AO towards disallowance of the trade discount on the ground that when the assessee itself has reversed the trade discount in the subsequent financial year and offered it to tax, then the question of making addition towards disallowance of the trade discount for the impugned assessment year does not arise because the said exercise is only a tax-neutral. The Ld.CIT(A) after considering the relevant submissions of the assessee and also taken note of various facts, condoned the delay in filing the appeal and admitted the appeal for adjudication. The Ld.CIT(A) has also deleted the
addition made by the AO towards the disallowance of the trade discount by following certain judicial pronouncements, including the decision of the Hon'ble Supreme Court in the case of Berger Paints India Limited Vs. CIT reported in (2004) 266 ITR 99, by holding that although the appellant has disallowed the trade discount for the impugned assessment year but the same has been subsequently reversed and offered to tax for the assessment year 2011-12. From the above, it is very clear that the taxability of the trade discount of Rs.3,99,77,971/- was not in dispute, but the only dispute is in the year, in which such tax should be paid. Since the adjustment sought to be made by the AO is a tax-neutral and further, the appellant had already reversed the said entry in the subsequent year, the CIT(A) directed the AO to delete the addition of trade discount of Rs.3,99,77,971/- for the assessment year 2010-11 with a direction to pass consequential order to assess the income of the assessee for AY 2011-12, the year in which the entry was reversed.
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.
11.1 In so far as various case laws discussed by the learned counsel for the assessee, including the decision of the Hon'ble Supreme Court in the case of Berger Paints India Limited (supra), we find that though the judgements are referred to in the context of different facts and further the ratio laid down in the said judgement on the principle of tax neutrality, therefore, cannot be applied to the facts of the present case for the simple reason that, as demonstrated by the ld.DR that it is not a case of tax neutrality, but is a case of payment of reduced tax for assessment year 2010- 11 by way of debiting the trade discount. Therefore, the case laws and judgements cited by the learned counsel for the assessee have been rejected.
In the result, the appeal of Revenue is allowed.
ITA No.615/Hyd/2015
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.
Order pronounced in the Open Court on 25th July, 2024.
Sd/- Sd/- (G. MANJUNATHA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 25.07.2024. TYNM/sps Copy to: S.No Addresses 1 Sree Rayalaseema Galaxy Projects Pvt. Limited, Flat No.40-304, Bhagyanagagar, Kurnool – 518004. 2 The Income Tax Officer, Ward – 1, Kurnool. 3 The Assistant Commissioner of Income Tax, Circle – 1, Kurnool. 4 Pr.CIT, Kurnool. 5 DR, ITAT Hyderabad Benches 6 Guard File By Order
