2013 (4) TMI 678 - AT - Income Tax

Cash discount allowed to the dealers and sub-dealers for promotion of goods - Non deduction of TDS - CIT (A) deleted the addition - Held that - As goods had been sold to dealers/ sub-dealers at arm s length on principal to principal basis and they were not acting on behalf of the assessee, therefore, there was no agency relationship with them. As per the policy of the assessee company, no commission was payable to the dealers / sub-dealers for promotion of the selling of the goods & this cash discount was for the prompt payment for the goods supplied to them as abetment of cost and not in the nature of commission, therefore provisions of section 194H are not applicable. In favour of assessee. Interest invested on capital work in progress out of its interest bearing funds - disallowance as the capital work in progress has not been put to use by the assessee for its business - CIT (A) deleted the addition - Held that - There was an opening balance at the beginning of the year under the head capital work in progress . Further as per the audited accounts of the assessee, there was no closing balance under the head capital work in progress . This shows that the work was completed during the relevant year & assets were ready for use or used for the business purposes during the year. Since there was nothing under the head capital work in progress , therefore, there is no question of establishing the nexus between the borrowed fund and the investment made - order of the CIT (A)sustained. In favour of assessee. Disallowance of un-vouched expenses under the sub-head leakage and wastage - CIT (A) deleted the addition - Held that - CIT (A) has rightly deleted the addition as these leakages and wastages debited in the books of account are part and parcel of manufacturing activity of the assessee. In favour of assessee.

Summary

Issues:
1. Deletion of addition on account of cash discount under section 40(a)(ia)
2. Deletion of addition on disallowance of interest attributable to capital work in progress
3. Deletion of addition on un-vouched expenses under the sub-head leakage and wastage

Analysis:

Issue 1: Deletion of addition on account of cash discount under section 40(a)(ia)
The appeal filed by the Revenue challenged the deletion of an addition of Rs.1,58,96,413 made by the AO on account of cash discount under section 40(a)(ia) of the Income-tax Act, 1961. The Revenue contended that the assessee failed to deduct or collect tax at source on the cash discount provided to dealers and sub-dealers, invoking the provisions of section 40(a)(ia). The Revenue argued that the relationship between the assessee and dealers/sub-dealers was that of principal-agent, necessitating TDS. However, the AR for the assessee argued that there was no agency relationship and the cash discounts were not in the nature of commission. The ITAT upheld the CIT (A)'s decision, stating that the dealers/sub-dealers were not acting on behalf of the assessee and the transactions were on a principal to principal basis, hence not falling under section 194H. The ITAT dismissed the Revenue's appeal on this ground.

Issue 2: Deletion of addition on disallowance of interest attributable to capital work in progress
The second issue involved the deletion of an addition of Rs.14,91,637 by the AO on disallowance of interest attributable to capital work in progress. The Revenue argued that interest on investments in capital work in progress, not put to use during the relevant period, should be disallowed. The AR contended that the work was completed during the year, assets were put to use, and there was no closing balance under capital work in progress, indicating completion. The ITAT found no nexus between borrowed funds and investments due to the absence of closing balance, sustaining the CIT (A)'s decision and dismissing the Revenue's appeal on this ground.

Issue 3: Deletion of addition on un-vouched expenses under the sub-head leakage and wastage
The final issue revolved around the deletion of an addition of Rs.9,35,784 disallowed by the AO on un-vouched expenses under the sub-head leakage and wastage. The AO disallowed the amount due to lack of supporting bills/evidences. The AR argued that leakages and wastages were normal in the manufacturing process and had been allowed in previous years. The ITAT upheld the CIT (A)'s decision, stating that leakages and wastages were inherent in the manufacturing activity and were part of normal business operations. The ITAT dismissed the Revenue's appeal on this ground.

In conclusion, the ITAT upheld the CIT (A)'s decisions on all three issues, dismissing the Revenue's appeal in its entirety.