The order of the Bench was delivered by
Challa Nagendra Prasad (Judicial Member)- This appeal is filed by the Revenue against the order of the Commissioner of Income-tax (Appeals)-VI, Chennai dated July 17, 2014 for the assessment year 2010-11.
2. The appeal of the Revenue is barred by 133 days. The Revenue filed an affidavit explaining reasons for the delay as under :
"The order of the Commissioner of Income-tax (Appeals)-VI, Chennai in I. T. A. No. 766/13-14 dated July 17, 2014 for the assessment year 2010-11 in the above case was originally received in the Office of Commissioner of Income-tax, Puducherry on July 26, 2014 and forwarded to the Office of Deputy Commissioner of Income-tax, Company Circle-V(2), Chennai on September 23, 2014 by the Deputy Commissioner of Income-tax, Circle-I, Puducherry based on change in jurisdiction. However, as the casewas already centralised by the Notification No. 3 of 2014-15 dated April 3, 2014, (copy enclosed) the Deputy Commissioner of Income-tax, Company Circle-V(2) has forwarded this order to Deputy Commissioner of Income-tax, Central Circle-IV(2), Chennai on October 7, 2014, who submitted the scrutiny report through the Joint Commissioner of Income-tax on October 31, 2014. On receipt of the scrutiny report, the Office of Commissioner of Income-tax, Central-1 requisitioned and obtained the order of the Commissioner of Income-tax (Appeals) on November 3, 2014 (copy enclosed). Since the Commissioner of Income-tax, Central-1 who was having jurisdiction over the case, received the appellate order on November 3, 2014, the same date was mentioned in the certificate under rule 15. However, inasmuch as the Commissioner of Income- tax, Puducherry, has received the appellate order on July 26, 2014, and since the limitation for filing a tax case appeal is 60 days, the appeal ought to have been filed on or before September 24, 2014. Since the appeal was actually filed on February 4, 2015 only, there is a delay of 133 days. Inadvertently, by oversight, this was wrongly mentioned as 92 days in the condonation petition filed originally along with appeal papers. The reasons for the delay are as follows :
'The relevant appellate order was sent by the office of Commissioner of Income-tax (Appeals)-VI to the Office of Commissioner of Income-tax, Puducherry, who was holding jurisdiction at the time of institution of the appeal before the Commissioner of Income-tax (Appeals). Later the case was centralised and the Commissioner of Income-tax, Central-1 became the jurisdictional Commissioner of Income-tax. And since the Commissioner of Income-tax, Central-1 received the order of Commissioner of Income-tax (Appeals)-VI only on November 3, 2014, the limitation date for filing appeal was reckoned from this date to be January 1, 2015 and judicial notes put up to Commissioner of Income-tax, Central-1 on December 24, 2014. But the file got mixed up with other files at the Office of Commissioner of Income-tax Central-1 and was handed over to the Assessing Officer on February 3, 2015, only. Immediately on receipt of the authorisation from the Commissioner of Income-tax, Central-1, the appeal papers were prepared and promptly filed on February 4, 2015 by Deputy Commissioner of Income-tax, Central Circle 1(2) as the charge of Central Circle-IV(2) merged with Central Circle-1(2).'
3. The delay was neither wilful nor intentional, but for the reasons aforesaid.
4. It is therefore prayed that this hon'ble Income-tax Appellate Tribunal may be pleased to condone the delay in filing the tax case appeal and thus render justice."
3. We have perused the reasons and are satisfied that there is a reasonable cause for the delay in filing of the appeal. Counsel for the assessee has no serious objection for condoning the delay. In the interest of justice, we condone the delay in filing of the appeal and admit the same for hearing.
4. The first issue in the appeal of the Revenue is that the Commissioner of Income-tax (Appeals) erred in holding that section 40A(2)(a) is not attracted since trade discount is not an expenditure as discount was not made in sale bill but only in the way of book adjustment.
5. The brief facts are that the assessee-company engaged in the business of manufacturing of detergent cakes, detergent powder and toilet soap and other chemicals. The assessee filed its return of income on October 15, 2009 admitting total income of Rs. 18,23,79,520 which was revised on January 13, 2011 admitting income of Rs. 12,87,49,070 after claiming deduction under section 80-IA of the Act. Assessment was completed under section 143(3) of the Act on March 25, 2013 determining the income of the assessee at Rs. 18,11,97,350. While completing the assessment the Assessing Officer disallowed Rs. 5,04,03,180 under section 40A(2)(a) of the Act being trade discount holding that the assessee allowed excess trade discount to sister concerns at around 7.29 per cent. The Assessing Officer was of the opinion that sister concerns are enjoying deduction under section 80-IB of the Act therefore, there is transfer of profit to sister concerns where trade discount allowed is equal to the net profit percentage of the assessee. Therefore there is a violation under section 40A(2) of the Act. On appeal, the Commissioner of Income-tax (Appeals) following various decisions of the High Court including the jurisdictional High Court in the case of CIT v. A. K. Subbaraya Chetty and Sons [1980] 123 ITR 592 (Mad) held that the Assessing Officer was clearly in error in disallowing trade discount under section 40A(2)(a) of the Act since trade discount allowed to sister concerns cannot be considered as an item of expenditure incurred by the assessee.
6. The Departmental representative vehemently supports the order of the Assessing Officer and submits that there is shifting of profits by the assessee to its sister concerns by way of trade discount and therefore the Assessing Officer has correctly disallowed the trade discount invoking the provisions of section 40A(2)(a) of the Act.
7. Counsel for the assessee strongly places reliance on the order of the Commissioner of Income-tax (Appeals) and the decision of the jurisdictional High Court in the case of CIT v. A. K. Subbaraya Chetty and Sons [1980] 123 ITR 592 (Mad) and submits that the provisions of section 40A(2)(a) have no application to the facts of the assessee'scase as trade discount allowed by the assessee is not an expenditure for disallowance within the scope of section 40A(2)(a) of the Act.
8. Heard both sides. Perused orders of the lower authorities and the decision relied on. The Assessing Officer while completing the assessment disallowed trade discount allowed by the assessee to its sister concerns stating that the assessee has violated the provisions of section 40A(2) of the Act. The Assessing Officer was of the opinion that since sister concerns are enjoying deduction under section 80-IB of the Act by way of shifting profits from the assessee. The issue has been elaborately considered by the Commissioner of Income-tax (Appeals) with reference to the findings of the Assessing Officer and the submissions of the assessee and following the various High Court decisions including the decision of the jurisdictional High Court in the case of CIT v. A. K. Subbaraya Chetty and Sons [1980] 123 ITR 592 (Mad) held that discount allowed to sister concerns were not unreasonable and cannot be excessive having regard to the market rate. The Commissioner of Income-tax (Appeals) also held that the Assessing Officer was in error in disallowing the trade discount under section40A(2)(a) since trade discount allowed to sister concerns cannot be considered as an item of expenditure incurred by the assessee observing as under :
"6.1.2 I have considered the findings given by the Assessing Officer in the assessment order and also submissions made by the authorised representative of the appellant along with the judicial pronouncements cited on this issue. It is an admitted fact that the trade discount allowed to the sister business concerns of the appellant was by way of book adjustment and that the appellant has realised the sale amount net of trade discount. Therefore, the appellant cannot be stated to have incurred any expenditure for which payment was made, so as to attract the provisions of section 40A(2)(a). The decision of the Madras High Court relied on by the learned authorised representative, namely, CIT v. A. K. Subbaraya Chetty and Sons [1980] 123 ITR 592 (Mad) clearly support the case of the appellant. Since the operative portion of this decision has already been reproduced in the earlier paragraph, the same is not repeated here. Very same issue came up recently before the Delhi High Court in United Exports v. CIT [2011] 330 ITR 549 (Delhi) (I. T. A. No. 356 of 2009). In this case the question before the honourable Delhi High Court was (page 555) "Whether in the facts and circumstances of the case, the Tribunal erred in law in interpreting section 40A(2) and holding it applicable to the appellant, when trade discount is not, expenditure paid and in any case, when it was lesser sales realization". The above question was answered by the honourable court in paragraphs 12 and 13 of their order, which is reproduced below (page 555) :
'12. Lastly, we fail to understand how the provisions of section 40A(2)(b) are, at all, applicable in the facts of the present case. Section 40A(2)(a) runs as under :
"(2)(a). Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."
13. This provision in the Act pertains to disallowance to an expenditure which is made by the assessee, i.e, an amount actually spent by the assessee as an expenditure. The expression used in this provision is "incurs any expenditure in respect of which payment has been or is to be made to any person" (emphasis supplied.) The emphasised words clearly show that actual payment must be made and there has to be an expenditure incurred before the provision can be said to be applicable. A trade discount, and admittedly it is not in dispute that the subject-matter of the claim is a trade discount, and not an expenditure, clearly therefore there does not arise the question of applicability of section 40A(2)(b). . . .
14. (ii) The provision of section 40A(2) did not apply to the facts of the present case inasmuch as the trade discount is not an expend iture which is incurred or with respect to which a payment is made.'
The facts of the case decided by the Delhi High Court and the facts in the case under appeal are identical. In both cases the trade discount allowed was by way of reducing the discount allowed from the sale amount. Hence, it is a case of less realisation of sale, rather than incurring any expenditure.
Similar issue came up before the Madhya Pradesh High Court in CIT v. Udhoji Shrikrishnadas reported in [1983] 139 ITR 827 (MP). In this case the assessee appointed Lalchand Shyamsundar, as the sole selling agent for the beedis manufactured by the assessee. The firm was entitled to receive a commission of 10 per cent. on the sales. The Assessing Officer noticed that this firm could be considered as a person 'within the purview of clause (b) of sub-section (2) of section 40A and that, since the assessee had sold goods to this firm at a rate lower than the market rate, the profit of Rs. 6,81,987 earned by the firm would amount to payment of additional commission. In view of this matter, the Assessing Officer made a disallowance of Rs. 6,81,987 under section 40A(2)(a). It was held by the court that the expenditure incurred by the assessee was the commission. Even if the assessee sold bidis to the sole selling agents at a price less than the market rate, the difference between the market rate and the price at which the bidis were sold cannot, in our opinion, be termed as expenditure incurred by the assessee. On the finding reached by the Tribunal, it has to be held that the Income-tax Officer was not right, in adding Rs. 6,81,987 under section 40A(2).'
Yet another case where the decision was on similar lines came before the Punjab and Haryana High Court recently in CIT v. Rajnish Ahuja [2013] 85 CCH 4 (P&H) ; [2013] 219 Taxman 85 (P&H) (Mag.). It was held that, 'section 40A(2) contemplates an assessee incurring any expenditure in respect of which payment has been made or is to be made to any person referred to in clause (b) of section 40A(2). If there were any such expenditure and if the Income-tax Officer was of the opinion that such expenditure was excessive or unreasonable, then so much of the expenditure as was considered by him as excessive or unreasonable was not to be allowed as deduction. We therefore have to consider whether there was any expenditure in this case. It was held by the Tribunal that the Assessing Officer made the addition solely on the ground that the assessee had charged less sale price from the sister concerns. The provisions of section 40A could not be invoked as no payment has been made to the sister concerns for any item of expenditure which the assessee might have been claimed as revenue expenditure'. The Tribunal found that the taxpayer can manage his affairs to reduce tax liability within the frame work of law and that the sale of goods at a lesser price to the sister concerns than the non-sister concerns does not violate any provisions of law. It was found that the finding recorded by the Tribunal does not give rise to any substantial question of law. It was held that the assessee had not violated any provisions of law while making sales to sister concerns at a lesser rate than non-sister concerns.
6.1.3 Respectfully following the decisions cited above, that the Assessing Officer clearly in error in disallowing the sum of Rs. 5,04,03,180 under section 40A(2)(a), since the trade discount allowed to its sister concerns cannot be considered as an item of expenditure incurred by the appellant, also no payment on the part of the appellant to the sister concern on this score to attract the provisions of section 40A(2)(a). The cases cited by the Assessing Officer are not applicable to the facts of the present case. As pointed out by the authorised representative of the appellant, in all those cases, payment of commission or interest to 'persons' referred to in clause (b) of section 40A(2) was clearly established attracting the application of this provision, it is seen that out of the total sale of acid slurry of Rs. 56,67,70,241, sales to the sister concerns were Rs. 55,65,16,559 which works out to Rs. 98.19 percentage of the total sales. Further even after allowing discount, the rate at which the goods were sold to sister concerns was more than the rate at which the sale was effected to others. Only in the case of M/s. Ultramarine and Pigments Ltd. the rate was slightly more. It is seen that, the purchaser was relatively new to the appellant and longer credit was allowed. It needs hardly any emphasis that bulk purchasers enjoy better bargaining power and therefore are able to get lower rate and discount. It is seen that the rate at which the goods were sold to sister concerns were not a ridiculously low rate, but, were at reasonable rates compared to the sale to others. Therefore it cannot be considered that the discount allowed to sister concerns was unreasonable and was excessive having regard to the market rate. Hence, the grounds of appeal filed by the appellant on this issue are allowed and treated as disposed of accordingly."
9. On going through the order of the Commissioner of Income-tax (Appeals), we do not find any valid reason to interfere with his findings. The Revenue has not filed any evidence to rebut the findings of the Commissioner of Income-tax (Appeals), therefore we sustain the order of the Commissioner of Income-tax (Appeals) and dismiss the grounds raised by the Revenue on this issue.
10. The next ground of appeal of the Revenue is that the Commissioner of Income-tax (Appeals) erred in holding that the assessee opted to claim depreciation as per Appendix-I at 80 per cent. on the windmill by way of claiming depreciation in the return of income and that such claim amounts to exercising option envisaged under second proviso to rule 5(1A). Consequently the assessee is not entitled to depreciation as per Appendix-I. The Assessing Officer while completing the assessment restricted the depreciation on windmill to 7.69 per cent. as against the claim of the assessee at 80 per cent. holding that the assessee has not exercised option for claiming higher depreciation. The assessee contended that it had already been opted to claim depreciation from the assessment year 2005-06 onwards for the windmill installed earlier. Hence, there is no need to exercise fresh option for the windmill installed in the previous year 2006-07. It was contended that once such option is exercised the assessee-company is deemed to continue in the same block of assets. However, the Assessing Officer restricted the depreciation at only 7.69 per cent. as against the claim of the assessee for 80 per cent. for the assessment year under consideration, i.e., assessment year 2010-11. On appeal, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee following his earlier decision rendered in the case of Narmada Chemicals Pvt. Ltd. in I. T. A. No. 766/13-14 dated July 17, 2014.
11. The Departmental representative places reliance on the order of the Assessing Officer.
12. Counsel for the assessee submits that the issue has been decided by the jurisdictional High Court in the case of CIT v. ABT Ltd. [2015] 370 ITR 159 (Mad).
13. After hearing both the parties and on going through the decision of jurisdictional High Court in the case of CIT v. ABT Ltd. [2015] 370 ITR 159 (Mad), we find that the issue is squarely covered in favour of the assessee as the hon'ble High Court held that if the assessee exercised option in terms of second proviso to rule 5(1A) of the Income-tax Rules at the time of furnishing of return of income, it will suffice no further letter of request or intimation with regard to exercise of option is required. Since the returns were filed in accordance with section 139(1) of the Act and the form prescribed therein make a provision for exercising option in respect of the claim of depreciation, no separate procedure is required. In the case on hand before us, the assessee has claimed higher depreciation in the return filed under section 139(1) of the Act claiming higher depreciation at 80 per cent. on windmill which amounts to exercise of option for higher claim. Thus, respectfully following the said decision of the jurisdictional High Court, we uphold the order of the Commissioner of Income-tax (Appeals) on this issue and reject the grounds raised by the Revenue.
14. In the result, the appeal of the Revenue is dismissed.
The order pronounced in the open court on 16th September, 2015.