The Chennai bench of the Income Tax Appellate Tribunal (ITAT) deletes the addition due to the disallowance of discounts or subventions in the Income Tax Assessment under Section 40 A of the Income Tax Act, 1961.
The assessee VST Auto Agency Ltd is a limited company engaged in the business of purchase and sale of trucks and motor cars and its spare parts. Income of Rs.5,44,68,360/- declared in the return filed on 29.09.2009 for the AY 2009-10.
The case was selected for scrutiny under CASS and notice was served under section 143(2) & 143(1) of the Income Tax Act, 1961. The Assessing Officer disallowed 15% of the total discount offered during the year and assessed the income at Rs.9,12,24,765/-. The assessee appealed to the CIT(A) but did not succeed on any of the issues.
The ground raised by the assessee is against disallowance at 15% of the discount/subvention paid debited in the P & L A/c. The similar issue was also raised by one same assessee for the year AY 2010-2011 and revenue has filed appeal on same issue and also filed by another group assessee. Since the issues were common, the same were being adjudicated together.
The facts in brief are that in the business of selling motor vehicles, selling price of the motor vehicles is fixed by the principal i.e. M/s.Tata Motors Ltd. In order to attract more customers from other competitors, M/s.Tata Motors Ltd., used to announce various discount schemes for each model based on the market conditions for its customers by way of cash discount, accessories discount, charges, insurance discount, etc.
The sale price at which various motor vehicles are to be sold by the distributor, is fixed by manufacturer by way of MRP and such discounts announced by M/s.Tata Motors Ltd., are passed on by the assessee to its customers.
In the case of M/s.VST Motor Ltd., for the AY 2009-10, the assessee company debited a sum of Rs.24,03,79,590/- as discount/subvention expenditure. The assessee was asked to explain said discount. It was submitted that such discount constitutes various items in which in some cases discount is given outrately in the bills, in some cases, out of the sum received towards sale, the discount portion is given back to the assessee through proper banking channel.
It is also stated that against the said total claim of discount, assessee has credited income received from M/s.Tata Motors Ltd., towards discount to be offered to the customers at Rs.11,75,65,765/-. However, for lack of evidences, confirmation, terms & conditions,Assessing officer made an ad hoc disallowance at 15% of the total discount of Rs.24,03,79,590/- and disallowed the expenditure at Rs.3,60,56,939/-.
The amount passed by the M/s.Tata Motors Ltd., towards discount expenses was Rs.17,92,82,676/-. For the remaining amount of discount expenditure, the Assessing officer was not satisfied with the details filed by the assessee and he completed the assessment disallowing 15% of the total amount of discount and addition was made at Rs.4,61,80,960.genuineness of the claim. However, for lack of sufficient evidence, the Assessing officer disallowed the claim of discount expenditure at Rs.2,77,15,594/-.
M/s.VST Auto Agency Ltd., for AY 2010-11, the disallowance has not been made towards discount expenditure, but Assessing officer examined the claim of vehicles sales expenses at Rs.1,64,96,450/-, but for lack of necessary details placed before Assessing Officer, disallowance @15% was made and sum of Rs.24,74,468/- was disallowed.
In the case of assessee M/s.VST Motor Ltd. for the AY 2011-12, the discount passed by M/s.Tata Motors Ltd., to the assessee for being further passed on to the customer’s amounts to Rs.3,251,70,846/-, but the discount debited in the P&L A/c is Rs.35,28,86,440/-. The Assessing Officer noticed that the assessee has passed the additional amount of discount at Rs.2,77,15,594/-.
The lower authorities disallowed this amount on the grounds that no prudent businessman would disburse the entire receipts towards expenses. However, the tribunal found no merits in this observation and deleted the addition of Rs.2,21,635/-, considering the regular course of business, absence of defects in the documentary evidence, and the possibility of excess payment towards service charges due to minor repairs, replacement of damaged parts, etc.
Additionally, the Tribunal noted that the assessee gets reimbursement of PDI service charges from the principal only in respect of trucks, but no such reimbursement is granted for cars. Consequently, the tribunal allowed the fourth ground of appeal raised by the assessee.
The Counsel for the assessee argued that full ledger copies of clients/customers were provided and that the income reported was based on the invoice value, with the amount of discount offered by M/s.Tata Motors Ltd. deducted from sales/expenses.
The Assessing Officer had doubts about certain expenses, such as insurance, which were claimed to have been incurred and actually paid by the assessee under a discount scheme. The Counsel referred to a Paper Book with details of discounts and provided some copies of tax invoices, debit notes, bank receipts, cash receipts, and bank payment credit notes for FY 2009-10 for test check purposes.
The Counsel also pointed out that the books of accounts were duly audited, and no discrepancies had been found by the Assessing officer. The Counsel argued that the ad hoc disallowance should be deleted. It was further stated that a similar disallowance for the AY 2010-11 had been deleted by the CIT (A), who had dealt with the issue in detail and found that the necessary details to explain the expenditure had been maintained by the assessee.
The counsel for the revenue submitted that the assessee has failed to file proper details to prove the claim of discount expenditure and there is no proper and regular system for passing such discounts and even the assessee failed to file any confirmation for passing such huge discounts.
It was also submitted that the discounts are normally passed on by the M/s.Tata Motors Ltd., to the assessee which is to be further passed on to its customers and to this extent, there is no dispute. However, for the discount passed, over and above, the amount received from M/s.Tata Motors Ltd., needs to be properly documented.
The bench of two members, the Judicial Member Manomohan Das and the Accountant Member Dr. Manish Borad observed that since the alleged payment of Rs.16,31,588/- has been paid by the assessee to M/s.Tata Motors Ltd., towards professional and technical services for developing of web enabled software SIBIL for marketing related information, which is in the view is payment for technical services and the same is subject to deduction of tax at source.
However, since assessee has not deducted TDS and the amount has been adjusted in the overall accounting of other transactions of purchase of goods from M/s.Tata Motors Ltd, the appeal filed by the assessee for the AY 2011-12 was partly allowed for statistical purposes.
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