INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD

ITA No. 543/Hyd/2013 & 1757/Hyd/2014 Assessment Year: 2008-09
Smt. E. Usha Rani, Khammam (Appellant) vs. Dy. Commissioner of Incometax (Respondent)
Date of Order: 30-11-2015

ORDER

PER S. RIFAUR RAHMAN, A.M.:
Both these appeals are filed by same assessee for the AY 2008-09.
ITA No. 543/Hyd/2013.

2. This appeal filed by the assessee is against the order of CIT, Vijayawada, dated 26/02/2013.

3. Assessee is the proprietrix of M/s Sri Sri Automobiles, engaged in the business of retail sale of Hero Honda two wheelers directly to the customers and through sub-dealers. The assessee filed her return of income for the AY 2008-09, admitting total income of Rs. 13,47,050/- and agricultural income of Rs. 84,000/-. The return was processed u/s 143(1) and the assessment was completed u/s 143(3) on 29/12/2010, determined the total income at Rs. 18,59,680/- by the Assessing officer (In short ‘AO’).

4. By virtue of powers vested u/s 263 of the Income-tax Act (in short ‘Act’), CIT called for assessment records. The CIT noticed certain deficiencies and issued show cause notice on 06/12/2012. He noticed two deficiencies as detailed below:

a) Assessee claimed an expenditure of Rs. 34,35,587 in the profit & loss statement towards sub-dealers cash discount, it represents the payments made to sub-dealers by parting 50% of profit margin on sale of two wheelers by the respective dealers to the customers in their area of operation. He also noticed that the actual sale bill was raised in the name of the ultimate customers and not in the name of the sub-dealers. The subdealers income are the share of margin and they never show any sales turnover in their statement of accounts. The profit margin is reduced from the dealer to the extent agreed with the sub-dealers. According to CIT, it was commission which falls under section 194A. The expenditure needs to be disallowed u/s 40(a)(ia) of the Act for non-compliance of TDS provisions on the payments made to sub-dealers.
b) Assessee debited an amount of Rs. 3,61,74,769/- and Rs. 9,20,541/- towards VAT in the trading account in respect of vehicles, spares, oils and accessories sold. The evidence was not brought on record by the AO during the course of assessment. It needs verification.

5. Subsequently, the assessee filed written submissions for the above deficiencies pointed out by the CIT on 30/12/12 (refer pages 42 to 45 of the paper book). The ld. CIT passed an order u/s 263 on 26/02/13 rejecting the submissions of the assessee and termed the assessment order as erroneous and prejudicial to the interests of revenue. Ld. CIT had rejected the submissions of the assessee on payment to sub-dealers and considered the same as commission payments. He accepted the submissions of the assessee on payment of VAT in respect of vehicles, spares, oils and accessories. Considering the above, he directed the AO to redo the assessment denovo.

6. Aggrieved with the above order, assessee is in appeal before us.

7. The ld. AR submitted that the AO had already verified the issue raised by the ld. CIT in detail. He submitted a copy of the letter filed by the assessee before the AO in response to the queries raised by him. (refer pages 31 to 36 of the paper book). He brought to our notice point No. 26 of the letter, wherein, assessee had clearly explained the sales discount as claimed by the assessee. The specific details of such payments and nature of the agreements with the subdealers. It was agreed by the AO. He submitted that the AO had taken a view on this issue but he had not discussed anything in his report. He also brought to our notice that the ld. CIT had initiated this proceeding only because audit objections were raised (refer pages 46 to 48 of the paper book) on these issues. It was not the finding of the ld. CIT. He also submitted that there may be two views, one of the views were taken by the AO. Hence, it is not erroneous. For this proposition he relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Green World Corporation, 314 ITR 81.

8. Ld. AR submitted that section 194H has no application in assessee’s case as no agent and principal relationship exists between assessee and sub-dealers. The sub-dealers pay only the net amount after deducting their share of discount. He submitted the confirmation of all the sub-dealers that they are dealing with the assessee only as principal to principal basis not as agents (refer pages 57 to 69 of paper book). He relied on the Hon’ble Delhi High Court’s judgment in the case of Jai Drinks P. Ltd., [2011] 336 ITR 303.

9. Ld. AR submitted that section 40(a)(ia) has no application in this case. Section 40(a)(ia) applies to expenditure payable as per the plain language of that Section. It does not apply to expenditure which is paid during the year. The expenditure in question is a sales discount passed through journal and not a cash payment. The sub-dealers pay the MRP less discount while taking the goods. However the MRP is debited to their account and credit for discount is passed through a journal entry. Thus this expenditure is neither paid nor payable but only a book adjustment entry. There is no outstanding on this account in the balance sheet. Hence the provisions of S.40(a)(ia) do not apply. He relied on the special bench decision of the Tribunal in the case of M/s Merlyn Shipping Transport & Others, 136 ITD 23(SB)(Vizag).

10. Ld. DR by referring to the page of 35 of paper book, submitted that the sales was effected in the name of customers and payments to subdealers are not discount, but, commission. She submitted that the principal is only the assessee not the sub-dealers. The view of the CIT was correct. She also relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Jai Drinks P. Ltd. (supra) where the assessee and the distributor were collecting and paying their sales tax separately. In the present case, the sales are only in the books of assessee and, therefore, the sales are not on principal to principal basis.

11. Ld. DR also submitted that the Hon’ble Calcutta High Court in the case of CIT Vs. Crescent Exports Syndicate had rejected majority views expressed in the case of Merlyn Shipping and Transport as not applicable. Similarly the Hon’ble Gujarat High Court in the case of CIT Vs. Sikandarkhan N Tumar had rejected the views expressed in the Merlyn Shipping Transport ‘s case (supra).

12. We have considered the submissions of the both the parties and perused the material on record. The ld. AR submitted that the AO had considered all the facts and information before completing the assessment. He had submitted the letters filed by the assessee before the AO on the same points which were raised by the CIT in his order u/s 263 of the Act. The same was submitted by ld. AR in his paper book at pages 31-36. These informations were considered by the AO which were submitted by the assessee in para No. 21. It is the fact that the AO had considered the facts and formed an opinion on the submissions of the assessee. It shows that there exists two views on the point of sub-dealers cash discount. The AO had taken the view, which he found acceptable, it cannot be construed as erroneous and as per the view of CIT, AO had not verified properly.

13. Another aspect which requires attention are that the CIT must apply his own mind. He can act on the basis of the records and suggestions put up to him by his subordinates but he cannot initiate action on the basis of audit objections. It was brought to our notice by the ld. AR that the audit objections were raised exactly on the same points and CIT had not applied his own mind and copied the same contents from the audit objections. Hence, CIT had not applied his own mind. (Refer pages 46-48 of paper book).

14. Both the counsels argued on the merits of the case, but, let us discuss first the issue of revision order u/s 263 of the Act. On this issue, we are relying on the following decisions of the coordinate benches of the ITAT/High Court:

1. In the case of Shri Jaswinder Singh Vs. CIT in ITA No. 690/CH/2010, the Chandigarh Bench held as follows:

“ In the back drop of the abovesaid settled legal precedents, we find that the Commissioner of Income Tax in the present case had also initiated the proceedings under section 263 of the Act on the basis of the audit objections. Show cause notice was issued in the present case for non-deduction of tax at source, out of certain expenses incurred by the assessee and order passed By the Commissioner of Income Tax under section 263 of the Act directing the Assessing Officer to re-determine the income of the assessee by applying a rate other than the rate applied by the Assessing Officer, being without jurisdiction, is not tenable in law. We find no merit in the plea of the learned D.R. for the Revenue that the source of information in the present case was audit objection, but there was independent application of mind by the Commissioner of Income Tax . The provisions of section 263 of the Act are clear and absolute that the power is to be exercised by the Commissioner of Income Tax from the examination of the records of the proceedings under the Act. The explanation under section 263 of the Act defines 'records' as all records relating to any proceedings under the Act available at the time of examination by the Commissioner. The audit objections under no circumstances can be called as record empowering the Commissioner of Income Tax to exercise jurisdiction under section 263 of the Act. Further it is apparent that the Commissioner of Income Tax has initiated the revision proceedings only on the basis of Audit Objection. Such exercise of power under section 263 of the Act is not tenable in law. Accordingly, we set aside the order passed by the Commissioner of Income Tax under section 263 of the Act. The grounds of appeal raised by the assessee are thus allowed.

2. In the case of CIT v. Sohana Woollen Mills [2007] 296 ITR 238 (P&H) (HC), the Hon’ble High Court held as follows:

“A reference to the provisions of Section 263 of the Act shows that jurisdiction thereunder can be exercised if the CIT finds that the order of the AO was erroneous and prejudicial to the interest of Revenue. Mere audit objection and merely because a different view could be taken, were not enough to say that the order of the AO was erroneous or prejudicial to the interest of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or not, has tobe decided having regard to a given fact situation.”

15. On the other hand, on merits, the assessee is a dealer and allowed the sub-dealers to sell the scooters on sharing of discount basis and principal to principal basis. The business model differs from industry to industry. In this line of business, it is not possible to carry out dealership in one place, it has to spread out with more show rooms. It is the decision of assessee’s commercial expediency, whether she can choose to open show rooms at difference places by incurring expenses and also pay commission to the agents or give sub-dealership to others, who will open the show rooms and share the revenues. In the present case, assessee has chosen the second option as appropriate model for its business. Revenue cannot question the wisdom of the assessee, how to carry on their business. Moreover, looking at the facts, no businessman will share 50% of the revenue as commission.

16. In the present case, the sub-dealers were depositing sale proceeds after deducting their share of discount. It clearly establishes that it is share of discount not commission. Discount on sale of scooters does not attract section 194H. We are relying on Apex Court judgment in the case of CIT Vs. Ahemdabad Stamp Vendors Association, [2012] 348 ITR 378 (SC) wherein it has held as under:

“ Heard learned counsel on both sides.
The respondent in this civil appeal is the Ahmedabad Stamp Vendors Association and the members of the said association are licensed stamp vendors.
We are satisfied that 0.50 per cent to 4 per cent discount given to the stamp vendors is for purchasing the stamps in bulk quantity and the said discount is in the nature of cash discount .
In the circumstances, we concur with the impugned judgment that the impugned transact ion is sale. Consequently, sect ion 194H of the Incometax Act , 1961, has no application.
The civil appeal filed by the department is dismissed with no order as to costs. ”

17. In view of the above discussion, we quash the order passed by the CIT u/s 263 and restore that of the order of AO.

ITA No. 1757/Hyd/2014
18. This appeal of the assessee becomes infructuous as we have quashed the order passed by CIT u/s 263, against which the AO passed the order u/s 143(3) r.w.s. 263 of the Act, as per the directions of the CIT.

19. In the result, appeal of the assessee in ITA No. 543/H/13 is allowed and ITA No. 1757/H/14 is dismissed.

Pronounced in the open court on 30th November, 2015.

(P. MADHAVI DEVI)     (S. RIFAUR RAHMAN)
JUDICIAL MEMBER    ACCOUNTANT MEMBER