M/S ESS ESS KAY ENGG. CO.P LTD , KAPURTHALA V. DEPUTY COMISSIONER OF INCOME TAX, CIRCLE IV, JALANDHAR

ITA 178/ASR/2018

AI Insights

The case involves M/s Ess Ess Kay Engg. Co. Pvt. Ltd., which appealed against the orders of the Commissioner of Income Tax (Appeals) concerning the assessment years 2013-14 and 2014-15. The primary issues in the appeals were the disallowance of special discounts and other expenses claimed by the appellant. The Assessing Officer (AO) had disallowed these claims, suspecting them to be a means to reduce tax liability, as the appellant company had reported losses. The CIT(A) upheld the AO's decision, leading to the current appeal. The Tribunal found that the CIT(A) had not adequately addressed the appellant's detailed submissions and the comparative analysis of trade discounts, leading to the decision to remand the case for a fresh evaluation.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 114492 (ITAT-AMRITSAR)
• Duration Of Justice: 4 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 21-02-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 01-04-2018
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Opportunity of being heard
• Section: 92E; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE DR. M. L. MEENA, ACCOUNTANT MEMBER AND SH. ANIKESH BANERJEE, JUDICIAL MEMBER I.T. A. Nos. 178 & 400/Asr/2018 Assessment Years: 2013-14 & 2014-15 M/s Ess Ess Kay Engg. Co. Pvt. Ltd., Factory Road, Kapurthala [PAN: AAACE 5057G] (Appellant) V. Dy. Commissioner of Income Tax, Circle-IV, Jalandhar (Respondent) Appellant by : Sh. S. K. Vatta, CA Respondent by : Sh. Ravinder Mittal, Sr. DR Date of Hearing : 22.02.2023 Date of Pronouncement : 02.03.2023 ORDER Per Dr. M. L. Meena, AM: Both the appeals have been filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-2, Jalandhar dated 24.01.2018 and 18.04.2018 in respect of Assessment Years 2013-14 & 2014-15. ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 2 2. The assessee has raised the following grounds of appeal in ITA No. 178/Asr/2018: “1. The CIT(A) has grossly erred in confirming the action of A.O., There by upholding the addition for a sum of Rs 10236902/- out of special discount, account thereby completely ignoring the detailed submissions made by the assessee. 2. The CIT(A) has erred in not agreeing to the assessee's submissions regarding the report u/s 92E of the IT Act duly certified by a chartered accountant. 3. The CIT(A) has erred in ignoring the submissions of the assessee regarding the complete details of the quantity wise sales made to the Ess Ess Kay Marketing Co. at a higher MRP. 4. The CIT(A) has erred in confirming the action of ITO thereby disallowing a sum of Rs 935071/- out of Director travelling expenses thereby ignoring the detailed submissions made by the assessee. 5. The CIT (A) has erred in confirming the action of the ITO by disallowing a sum of Rs. 68,9000/- out of travelling expenses(others). 6. The CIT(A) has grossly erred in confirming the addition of Rs 2 Lacs out Business Promotion Expenses made by the Assessing Officer on estimated basis. 7. The assessee craves leave to add, amend, alter or delete any of the grounds of appeal before or at the time of hearing.” 3. Grounds of appeal in ITA No. 400/Asr/2018: “1. The CIT(A) has grossly erred in upholding the action of the Assessing Officer regarding the disallowance of Rs.1975627/- given as special discount to M/S Ess Ess Kay Marketing Company Pvt. Ltd on the following issues: ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 3 a. That the Directors of both the companies are same, which is factually incorrect. b. That the finding of the A.O. that this amount has been paid to reduce the profits of the assessee company which is totally wrong, as the assessee company has already suffered a loss in its business exceeding Rs.1 Crore. As such the question of reducing the profits of the assessee company by way of giving discounts does not arise. c. The C.I.T. (A) has ignored the fact that the total amount of discount given to M/S Ess Ess Kay Marketing Company Pvt. Ltd is through credit notes and has been given on merits considering the volume of sales to M/S Ess Ess Kay Marketing Company Pvt. Ltd which is 22% of the total sales made by the assessee company. 2. The CIT (A) has erred in confirming the disallowance made by the A.O. for Rs.428441/- on account of rebate and discount to other parties. The A.O has wrongly stated that the assessee has not agitated this disallowance as proper replies were filed before the A.O. 3. The assessee craves leave to add, amend, alter or delete any of the grounds of appeals before or at the time of hearing.” 4. There are similar grounds on major common issue of special discount, besides other travelling and rebate expenses challenged in the multiple grounds, on identical facts by the appellant and hence both the appeals are heard and adjudicated together for brevity. 5. Facts are discussed from I.T. A. Nos. 178/Asr/2018 in respect of the Assessment Year 2013-14 as a lead case. The appellant has claimed the special discount allowed to the related party on the ground that market conditions were adverse and therefore special discount of Rs. 102.36 lakh ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 4 was given to the sister concern in order to boost the sales. AO has held that claim made by the appellant is not correct as sales have been made to other parties also and discount at the same rate was not allowed to those parties. The explanation furnished by the appellant company was found to be misleading and with the purpose to reduce the tax liability in its hands. The financial statements of the related company have also been examined by the AO and it was held that only a nominal income has been declared by that company for tax purposes. Being not satisfied with the reply of the Assessee, AO made addition on account of unexplained claim of special discount on sales to sister concern to M/S Ess Ess Kay Marketing Company Pvt. Ltd through credit notes, besides rebate and discount to other parties, travelling expenses etc. 6. In Appeal, the Ld CIT(A) has confirmed the addition by observing as under: 4.8 The appellant company has reiterated the submissions filed in the course of assessment proceedings and has justified the transactions made with the related party. During the course of present proceedings the appellant company has stated that complete quantitative details with regard to the effect of increase in MRP have been furnished so as to justify the special discount allowed to the related party, It is stated that this discount has been given in the course of business transactions carried out with that company and audit under section 92E of the IT act has also been carried out. ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 5 4.9 I have carefully considered the material available on record and find that it is an accepted fact that out of the total amount of Rs. 152.15 lakh claimed under the head special discount, an amount of Rs. 102.36 Lakh has been given to M/s Ess Ess Kay Marketing Co P Ltd, which is the related party. I have also gone through the sales analysis of electrical accessories filed by the appellant in the course of present proceedings but find the same to be of no use as it does not lead to any finding for or against the appellant. The fact that audit as required under section 92E of the IT act has been carried out does not absolve the appellant of the justification for the expenses claimed on this account as it has already been brought out by the AO that audit report in the case of the appellant as well as the related party has been signed by the same auditor. 4.10. I find that appellant company has not been able to produce any material evidence on record either in the course of assessment proceedings or in the course of appellate proceedings so as to justify the services rendered by the related company M/s Ess Ess Kay Marketing Co P Ltd. I have also noted the fact that M/s Ess Ess Kay Marketing Co P Ltd has earned all the revenue from the appellant company including the other income of Rs.23.80 lakhs. The very existence of the related party is found to be solely dependent on the appellant and is nothing but a ruse. Thus, the whole arrangement is found to be collusive with the sole intent of reducing the tax liability. In the absence of any evidence available on record with regard to the services being rendered by that company, I hold that AO was justified in disallowing the claim of the appellant. Accordingly, I confirm the addition of Rs. 1,02,36,902 made by the AO under this head.” 7. The Ld. Counsel for the assesse reiterated the submission made before the lower authorities and contended that the CIT(A) has grossly erred in confirming the action of A.O. by upholding the addition for a sum of Rs 10236902/- out of special discount, thereby completely ignoring the detailed submissions made by the assesse; that he did not rebut to the ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 6 assessee's submissions regarding the report u/s 92E of the IT Act duly certified by a chartered accountant; and that completely ignored the submissions of the assessee regarding the complete details of the quantity wise sales made to the Ess Ess Kay Marketing Co. at a higher MRP. The Ld. CIT(A) has not appreciated facts and assesses submission on record regarding claims of travelling expense and rebate & discount to other parties. The Ld. Counsel for the assesse filed the written synopsis in support of its contention which are placed on record with a request to remand the matter back to the file of the Ld. CIT(A) to pass speaking order. 8. Per contra, the Ld DR although supported the impugned order, however, he has no objection to the request of the Ld. Counsel to remnd the matter to the Ld. CIT(A). 9. Heard rival contentions, perused the material on record, impugned order, written submission filed before us. Admittedly, the assessee submitted requisite documents/statements of Sales Analysis of Electrical switchgears and accessories products, comparative analysis of sales to high Discount parties in comparison with Ess Ess Kay Marketing Co. (P) Limited, an associate entity, both segments represented by accredited ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 7 dealers net work, and other dealers, not being accredited dealers net work parties, duly marked segment 'A', 'B', & 'C' respectively showing as under: (i) Comparative trade discount allowed in % terms - in respect of each of the three segments ' A', ' B' and ' C’. (ii) Numbers of parties alongwith names and cities. (iii) MRP values; (iv) Taxable value of sales; (v) Trade Discount allowed; 10. The Ld. Counsel argued that the appellant explained average trade discount for the year ended 31.03.2013 in respect of all the three segments A, B, and C, while arriving at .52.37%. The Ld. AR contended that both the worthy CIT(A) and Ld. ACIT, while passing their orders have failed to consider & appreciate that the assessee's averments were correct vis a vis the fact; that associate entity was billed on higher MRP value, the % trade discount as allowed was being i.e. 61.85% as compared 69.99% to other accredited dealers network entities, and therefore, consequently the associate entity was required to be compensated by way of special discount at the year end and that the said special discount of Rs. 1,02,36,900/- was in due cognizance of the loss suffered by the said associate entity, who was allowed lower Trade Discount %. Consequently, it was billed at higher MRP price. He argued ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 8 that the % trade discount of Rs.52.37 was an average % of the trade discounts to separate three different segments of dealers net work i.e. 'A' & 'B' being accredited dealers and 'C' being retail customers dealers and thus was not a comparable % vis a vis the said average trade discount to respective Segments ' A' and ' B'. Therefore, for proper comparison analysis, one has to compare 'Apple' with 'Apple' and not 'Apple' with 'Bananas'. 11. Considering the facts of the case and the factual submission of the appellant that the explanation offered before the authorities below were also be in complete consonance with the comparative trading and as well as net profits results of the company as per Page 13 vide "Volume II" dated 30 th June, 2022, which has been ignored by not appreciating. In view of the matter, we consider that it is a fit case to be remanded back to the Ld. CIT(A) to adjudicate the issue afresh with due consideration of submissions of the appellant in respect of viewing comparative analysis of the trade discount vis a vis special discount and comparative financial results (APB, Page 13) and the applicable comparables for deciding the reasonableness of Trade discount and other claims of expenditure while ITA Nos. 178 & 400/Asr/2018 Ess Ess Kay Engg. Co. P. Ltd. v. Dy. CIT 9 arriving at the conclusion whether the addition made by AO were justified, in respect of both the assessment year by passing a speaking order. 12. Thus, the issues pertaining to claim of special discount on sales to sister concern to M/S Ess Ess Kay Marketing Company Pvt. Ltd through credit notes, rebate and discount to other parties, travelling expenses etc. either to director or other employees in respect of both the captioned appeals on identical facts, are remanded to the Ld. CIT(A) for afresh adjudication after considering the submission of the assessee and after affording an adequate opportunity of being heard to the appellant. 13. In the result, the captioned appeals are allowed for statistical purpose. Order pronounced in the open court on 02.03.2023 Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member *GP/Sr./P.S.* Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By Order