Income Tax Appellate Tribunal - Delhi
Crystal Phosphate Ltd., Sonepat vs Department Of Income Tax
BEFORE THE INCOME TAX APPELLATE TRIBUNAL,
"DELHI BENCH - B", NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA NO.2740/DEL.2011
(ASSESSMENT YEAR : 2008-09)
Addl. CIT, Sonepat Range, vs. M/s. Crystal Phosphate Ltd.,
Sonepat. Village Nathupur,
Distt. Sonepat.
(PAN NO.AABCC1978R)
(APELLANT) (RESPONDENT)
ASSESSEE BY : Shri Gautam Jain, CA
DEPARTMENT BY : Mrs. Shyama S. Bansia, DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This is an appeal filed by the Revenue against the order of the CIT (Appeals), Rohtak dated 31.03.2011 for the assessment year 2008-09. The grounds of appeal taken by the Revenue are as under :-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs.1,58,96,413/- which was made by the AO on account of disallowance of cash discount amounting to Rs.1,58,96,413/- u/s 40(a)(ia). The assessee allowed cash discount amounting to Rs.1,58,96,413/- to the dealers and sub-dealers for promotion of goods and assessee failed to deduct or collect any tax at source on this cash discount, therefore, provisions of section 40(a)(ia) of the Act were applicable in the case of the assessee. The decision of Honorable Kerla High Court in the case of Vodafone Essar Cellular v/s ACIT reported in 194 Taxman 518 is applicable in the case of the assessee.2 ITA NO.2740/DEL/2011
2. The Ld. CIT(A) has erred in law and facts in deleting the addition of Rs.14,91,637/- which was made by the AO, by disallowing interest attributable to Rs.1,10,49,168/- invested on capital work in progress out of its interest bearing funds. The capital work in progress has not been put to use by the assessee for its business; therefore, interest attributable to this investment was disallowed.
3. The Ld CIT(A) has erred in law and facts in deleting the addition of Rs.9,35,784/- which was made by the AO by disallowing un-vouched expenses under the sub-head leakage and wastage and 'no justification/evidences of the expenses claimed under the sub head was produced before the A.O."
2. The assessee is a public limited company engaged in the business of manufacturing and sale of pesticides, insecticides and fertilizers. The turnover of the company for the year under consideration was Rs.245.21 crores. The gross profit declared during the year was @ 19.70% and the income was returned at Rs.8,50,86,620/-.
3. In the ground no.1, the revenue has challenged the deletion of Rs.1,58,96,413/- made by the AO on account of cash discount u/s 40(a)(ia) of the Income-tax Act, 1961.
4. The revenue is contesting that assessee has allowed cash discount to the dealers and sub-dealers for promotion of sales of goods and the assessee has failed to deduct or collect any tax at source on these discount amounts. The revenue's contention is that provisions of section 40(a)(ia) are applicable. The reliance was placed on the decision of Hon'ble Kerala 3 ITA NO.2740/DEL/2011 High Court in the case of Vodafone Essar Cellular vs. ACIT reported in 194 Taxman 518.
5. While pleading for revenue learned DR relied on the order of AO and submitted that the assessee was giving discount to the dealers/sub- dealers. They are not the ultimate end user/customers. He submitted that these dealers/sub-dealers function for all practical purposes as agent of the assessee, therefore, there existed the relationship of principal to agent. In view of these facts, there was obligation on assessee to deduct tax at the time of payment which has not been done. For not making TDS, the provisions of section 40(a)(ia) are applicable. Therefore, order of CIT (A) deserves to be set aside.
6. On the other hand, the learned AR submitted that the commission or the brokerage has been defined in Explanation to Section 194H of the Income-tax Act and as per this section, any payment for services rendered by a person acting on behalf of another person or for any services in the course of buying or selling goods or in relation to any transaction relating to any asset, valuable article or thing is commission or brokerage. Thus, the essential precondition for holding any sum to be commission is that such payment must have been for services rendered by a person acting on behalf of assessee or such services were provided in the course of buying or selling of goods or in relation to any asset, valuable, article or thing or by a person acting on behalf of another person. Thus, the element of 4 ITA NO.2740/DEL/2011 agency, i.e. principal - agent relationship is an essential statutory precondition for invoking section 194H of the Income-tax Act. This proposition has been held by various courts including jurisdictional High Court in the case of CIT vs. Singapore Airlines, 319 ITR 29 (Del.) and CIT vs. Idea Cellular Ltd., 325 ITR 148 (Del.). He further submitted that the assessee is engaged in the business of manufacture and sale of pesticides, insecticides and fertilizers and in the course of business, cash discounts were allowed to the dealers/sub-dealers depending upon the promptness of payment of the sales consideration. All the details were submitted. The assessee was having 1246 dealers/sub-dealers at various places. These dealers and sub-dealers do not represent the assessee's company for rendering any service therefore, they are not entitled for any commission. The sale transactions with the dealers/sub-dealers are direct and on the basis at arm's length. The relationship is principal to principal basis. For this proposition, he relied on the decision of Bhopal Sugar India Ltd. vs. STO reported in AIR 1977 S 1275. He also submitted that there is no agency agreement between the assessee and its dealers/sub-dealers. These dealers/sub-dealers were only asked to fill up customer appointment forms before appointing them as dealers/sub- dealers but as per the sales policy of the company, no commission was to be paid to the dealers/sub-dealers. The property including all risks and liabilities are transferred to these dealers/ sub-dealers upon the delivery of 5 ITA NO.2740/DEL/2011 the goods by the assessee company and any further dealing with the goods is on the risk and at the expenses of the concerned dealers/ sub- dealers. Since these dealers/ sub-dealers neither acts on behalf of assessee company nor renders any services in the course of buying or selling goods, therefore, these transactions with these dealers/ sub-dealers are not covered by the provisions of section 194H. The title of the goods sold to these dealers/ sub-dealers passes on to them on the raising of the invoices of the goods. He also relied on various decisions of ITAT including Hon'ble Delhi High Court decision in the case of CIT vs. Jai Drinks Pvt. Ltd. in ITA No.399/2010 dated 6.1.2011, ITAT decision in the case of Addl. CIT vs. Pearl Bottling (P) Ltd. in ITA No.367/Vizag/2009 dated 10.02.2011, Shri Baiyanath Ayurved Bhawan Ltd. vs. JCIT 83 TTJ 409 and ITO vs. Mother Dairy Food Processing Ltd. in ITA No.385/Del/2010. He also submitted that discount is abetment of cost and is not in the nature of commission so that provisions of section 194H comes into play. For this, he relied on the decision of Hon'ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs. UOI 257 ITR 202 (Guj.), M.S. Hameed vs. Director of State Lotteries 249 ITR 186 (Ker.), CIT vs. Moving Picture Co. (India) Ltd. 20 SOT 120 (Del.) and Kerala State Stamp Vendors Association vs. Office of the Accountant General and Ors. 282 ITR 7 (Ker.). He finally submitted that AO's contention that assessee was having principal - agent 6 ITA NO.2740/DEL/2011 relationship is factually and legally incorrect. The relationship between assessee and the dealers/ sub-dealers was of principal - principal basis. He also submitted that the contention of the AO that payment was made for promotion of goods is also factually incorrect. There is no such sale policy of the company. These cash discounts were only for prompt payment of the goods sold to dealers/ sub-dealers. He also submitted that the decision of CIT vs. Idea Cellular Limited reported in 325 ITR 148 (Del.) and Vodafone Essar Cellular Ltd. vs. ACIT reported in 194 Taxman 518 (Kar) has no applicability in the case of assessee. Those cases were having completely different set of facts than the assessee's case. The identical expenditure has been allowed in the preceding years without invoking the provisions of section 40(a)(ia) read with section 194H of the Income-tax Act. Therefore, on the ground of consistency also, such disallowances were not called for and for the ground of consistency, he relied on the following decisions :-
(i) CIT vs. J.K. Charitable Trust 308 ITR 161 (SC);
(ii) Radha Saomi Satsang vs. CIT 193 ITR 321 (SC);
(iii) CIT vs. Girish Mohan Ganeriwalia 260 ITR 417 (P&H) He also submitted that AO has accepted rebate and off-season discount in assessee's own case. Finally, he pleaded that no sum was payable at the end of the year. He also submitted that in many of the cases, the discount was less than Rs.5,000/-, therefore, otherwise also, the 7 ITA NO.2740/DEL/2011 provisions of section 194 H were not applicable. He finally prayed to sustain the order of CIT (A).
7. We have heard both the sides on the issue and after hearing both the sides, we find that the assessee was selling the goods to its dealers/ sub-dealers at arm's length. These dealers/ sub-dealers were not acting on behalf of the assessee. The goods were sold to these dealers/ sub- dealers on principal to principal basis. There was no agency relationship with them. Further these dealers/ sub-dealers have not given any service in the course of buying and selling of the goods. Since the goods had been sold to them as 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. Such discounts were in the form of abetment of cost and not in the nature of commission, therefore, in our considered view, the provisions of section 194H are not applicable. In view of these, we find no fault in the order of CIT (A) on this issue and we sustain the same. Accordingly, this ground of revenue's appeal is dismissed.
8. In the ground no.2, the issue involved is deleting the addition of Rs.14,91,637/- which the AO held by disallowing interest attributable to the amount invested on the capital work in progress of Rs.1,10,49,168/-. 8 ITA NO.2740/DEL/2011 This capital work in progress has not been put to use for its business during the relevant period, therefore, interest attributable to this investment in capital work in progress is not allowable expenditure. The learned DR relied on the order of AO and submitted that the assessee has taken fresh interest bearing loans during the year and has also made investment in the capital work in progress to the tune of Rs.1,10,49,168/- and these assets were not put to use during the relevant period. Therefore, interest attributable to these investments deserves to be disallowed and CIT (A) is not justified in allowing the claim of the assessee.
9. On the other hand, the learned AR submitted that there was an opening balance in the capital work in progress. Further the work was completed during the year and the asset was put to use which is evident from the fact that there was no closing balance at the end of the year under the head capital work in progress. Therefore, the AO's observations that the assets were not put to use is factually incorrect and he also pleaded that there is no direct nexus between the borrowed fund and amount invested in work in progress. The assessee was having opening share capital to the tune of Rs.6.57 crores and reserves and surplus of Rs.13.36 crores. Ld. AR relied on various judgments including the judgment of Hon'ble Delhi High Court in the case of CIT vs. Jet Air Pvt. Ltd. in ITA No.1231 dated 02.12.2009.
9 ITA NO.2740/DEL/2011
10. We have heard both the sides and after hearing, we find 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. The 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. In view of these facts, we sustain the order of the CIT (A) on this issue and dismiss this ground of revenue's appeal.
11. In the ground no.3, the issue involved is deleting the addition of Rs.9,35,784/- which has been disallowed by the AO on account of unvouched expenses under the sub-head leakage and wastage.
12. The AO has held that the explanation given by the assessee was not found convincing because it was not supported by any bills/evidences. The AO also held that the wastage/leakages were due to improper handling by the transporters and in the godowns. The assessee has failed to produce any convincing explanation and the amount was disallowed.
13. The learned DR relied on the order of the AO.
14. The learned AR submitted that the leakages and wastages are part and partial of the manufacturing activity carried out by the assessee 10 ITA NO.2740/DEL/2011 company and these have been allowed in the past years. For the AY 2004-05, such expenses were 0.02% of the total sales and the same were allowed while making the order u/s 143(3) of the Income-tax Act. While in the year under consideration these are only 0.04% of the sales. These are normally leakages and wastages occurred during the normal course of business. During the year, the gross profit has also shown increasing trend. He submitted that the order of the CIT (A) may be sustained.
15. We have heard both the sides and considered the facts involved on the issue and after considering these facts, we hold that the CIT (A) has rightly deleted the addition. These leakages and wastages debited in the books of account are part and parcel of manufacturing activity of the assessee. Therefore, we sustain the order of the CIT (A) and this ground of revenue is dismissed.
16. In the result, the appeal of the revenue is dismissed.
Order pronounced in open court on the 19th day of August, 2011.
Sd/- sd/-
(C.L. SETHI) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 19th day of August, 2011/TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A), Rohtak.
5.CIT(ITAT), New Delhi.
AR/ITAT