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2016 (10) TMI 1340 - AT - Income TaxAddition towards Service Commission, yet to be paid to the dealers, which is only a provision - CIT-A deleted the addition - main contention of the D.R is that the Service Commission is only a provision made in the books of accounts and it was not actually incurred - A.R submitted that the assessee has been following the same system of book keeping consistently from year to year and this Sales Commission embedded to the sales - HELD THAT - Whenever assessee makes the sales corresponding liability attached to the assessee to maintain air conditioners in a better condition of operations for a particular period and for which the assessee is providing free maintenance warranty, which involves the cost to be borne by the assessee for which the assessee is making the provision in the books of account of assessee. Further, he submitted that when the assessee recognized the income on the sale of the air conditioners at the same time on provisional basis, provision towards services created by the assessee. According to him, the Department cannot disturb the consistent method of accounting followed by the assessee. In our opinion, if the Service Commission is directly attached to sales made by the assessee and as soon as sales are accounted corresponding service charges/commission to be incurred by the assessee to be booked in the books of account of assessee. Accordingly, we are inclined to remit the issue to the file of AO to verify the books of accounts of assessee whether the Service Commission is debited when the sales made and if the assessee charges service commission as soon as the sales is made, the claim of assessee is to be allowed, as it is related to the sales of air conditioners. With this observation, we remit the issue to the file of AO for fresh consideration. Disallowance u/s.14A - HELD THAT - In this case the undisputed facts are that the assessee not able to show that sources of funds, which were diverted into investment in shares, which has not yielded any dividend income, even if assessee earned dividend income, it is exempted u/s.10(33) of the Act from the tax liability and the same cannot be computed under the head income from other sources . The expenditure incurred to earn exempted income is not liable for deduction in view of Sec.14A - the jurisdictional High Court in the case of CIT Vs. Seshasayee Paper And Boards Ltd. 1984 (4) TMI 17 - MADRAS HIGH COURT wherein held that the borrowing has not been made exclusively and wholly for the purpose of earning interest, in which case alone it should be taken as income, which should be deducted from the interest receipts. Further, Hon ble Karnataka High Court in the case of Pradeep Kar Vs. ACIT 2009 (6) TMI 331 - KARNATAKA HIGH COURT wherein held that dividend income being exempt u/s.10(33) and not assessable to tax, assessee was not entitled to deduction for interest in view of Sec.14A of the Act. Accordingly, this ground of the Revenue is allowed. Disallowance of trade discount given to the sister concerns - HELD THAT - In our opinion if the expenditure is debited to the P L A/c and claim it as an expenditure in computing the income of assessee, provisions of the section 40A(2) of the Act is applicable. Before us, ld.A.R submitted that it is only the deduction in the sales value made to the sister concerns, and it is not claimed as expenditure in the books of account of assessee and discount was passed by the assessee while making the sale itself, and there is no separate discount was claimed by the assessee - we find that this fact has not come from the orders of the lower authorities. In our opinion, unless the entire facts are brought on record, we are not in a position to appreciate the findings of the Ld.CIT(A), so in the interest of justice we remit the issue to the file of AO whether the trade discount is given to the sister concern in the sales bills itself or separate credit has been given after the sales has been effected. If the separate sales discount is given after the sales, then the provisions of the section 40A(2) be applied. With this observation, we remit the issue to the file of AO for fresh consideration.
Issues Involved:
1. Deletion of addition towards Service Commission yet to be paid to dealers. 2. Deletion of disallowance under Section 14A of the Income Tax Act. 3. Deletion of disallowance of trade discount given to sister concerns. Detailed Analysis: 1. Deletion of Addition towards Service Commission Yet to Be Paid to Dealers: The assessee claimed Service Commission as an expenditure when air conditioners were sold to dealers. The Assessing Officer (AO) disallowed this provision, arguing that the expenditure would only accrue when the units were sold by the dealer and installed at the customer's premises. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claim, noting that the liability was created at the event of sale, making it a present obligation. The CIT(A) observed that the provision was created scientifically and reliably under the matching concept at the time of sale, and the liability was continuously discharged by issuing credit notes to dealers. The Tribunal remitted the issue to the AO to verify if the Service Commission was debited when sales were made, and if so, the claim should be allowed. 2. Deletion of Disallowance under Section 14A of the Income Tax Act: The AO found that the assessee held investments capable of generating tax-free income and disallowed an amount under Section 14A, arguing that expenses must be divided between exempt and taxable streams of income. The CIT(A) allowed the appeal, relying on the Delhi High Court judgment in M/s. Cheminvest Limited Vs. DCIT, holding that since the assessee had no exempt income, disallowance under Section 14A was not applicable. The Tribunal, referencing the Madras High Court and Karnataka High Court judgments, concluded that the expenditure incurred to earn exempt income is not deductible, thus allowing the Revenue's ground. 3. Deletion of Disallowance of Trade Discount Given to Sister Concerns: The AO disallowed trade discounts given to sister concerns, citing the lack of approval from the Central Government as required under Section 297(1) of the Companies Act, 1956. The CIT(A) allowed the appeal, noting that the payment of trade discount did not attract the provisions of Section 40A(2) of the Income Tax Act and was not in violation of the Companies Act. The Tribunal, referencing the decision in DCIT Vs. M/s. Power Soaps P. Ltd., remitted the issue to the AO to verify whether the trade discount was given in the sales bills or as a separate credit after the sales. If the latter, Section 40A(2) would apply. Cross Objections: The Cross Objections filed by the assessee were supportive of the CIT(A)'s order and did not require separate adjudication. Conclusion: The appeals of the Revenue were partly allowed for statistical purposes, and all the Cross Objections raised by the assessee were dismissed. The order was pronounced on 05th October 2016, at Chennai.
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