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2009 (8) TMI 60 - HC - Income TaxExcessive amount paid to sister concern applicability of provisions of section 40A(2)(b) AO allowed the trade discount at the rate of 3% only CIT(A) increased it to 8% - ITAT reduced it to 5% - Assessee claimed 11% - Held that - ITAT has clearly erred and its findings cannot be said to be those of a reasonable person. The conclusions are clearly perverse and are liable to be set aside - it is quite clear that a trade discount of 11% was allowed in the AY 03-04 and that too when the sales to the sister concern was Rs. 2.09 crores as compared to Rs. 8.30 crores made to others. In the present AY the sale to the sister concern was 11.11 crores and to others it was Rs. 2.09 crores - trade discount at 11% justified - Further there is no rationale or basis or any logic of the authorities below in unilaterally deciding a disallowance by reducing the entitlement On the issue of application of section 40A(2)(b) - held that - trade discount is a trade discount and not an expenditure therefore there does not arise the question of applicability of Section 40-A(2)(b).
Issues:
1. Dispute over the reduction of commission for sale of goods to sister concern. 2. Justification of higher trade discount given to sister concern. 3. Application of Section 40A(2)(b) regarding excessive discount. 4. Consistency in trade discount rates. 5. Interpretation of trade discount as an expenditure under Section 40A(2). Issue 1: Reduction of Commission for Sale of Goods to Sister Concern The appellant, a partnership firm engaged in rice export, challenged the Income Tax Appellate Tribunal's decision to reduce the commission for sale of goods to its sister concern from 8% to 5%. The Assessing Officer initially allowed only 3% commission, which the CIT increased to 8%. The Tribunal further reduced it to 5%, citing reasons of excessive discount compared to other parties and lack of justification for the higher rate. The appellant argued for consistency in discount rates and the business justification for the higher discount given the increased sales to the sister concern. Issue 2: Justification of Higher Trade Discount to Sister Concern The appellant justified the higher trade discount of 11% to the sister concern, M/s. United Overseas, based on increased sales volume and credit balance maintained by the sister concern. The CIT acknowledged the business expediency of offering a better discount to the sister concern due to higher purchases and credit facilities provided. The Tribunal, however, focused on the disparity between the discount rates offered to the sister concern and other parties, emphasizing the excessive nature of the 11% discount compared to the 3% offered to domestic customers. Issue 3: Application of Section 40A(2)(b) Regarding Excessive Discount The Assessing Officer invoked Section 40A(2)(b) to question the excessive discount given to the sister concern, leading to a series of adjustments by the authorities. The Tribunal considered the justification provided by the appellant for the higher discount, emphasizing the need for a valid basis for reducing the discount rate. The appellant argued against the unilateral reduction of the discount percentage without proper rationale or basis. Issue 4: Consistency in Trade Discount Rates The appellant contended for consistency in trade discount rates, citing the previous year's acceptance of an 11% discount rate for the sister concern. The Tribunal's decision to reduce the discount rate without a clear basis or logic was challenged by the appellant, highlighting the lack of justification for the ad hoc disallowance of the trade discount. Issue 5: Interpretation of Trade Discount as an Expenditure under Section 40A(2) The High Court analyzed the applicability of Section 40A(2) to the trade discount claimed by the appellant. It clarified that Section 40A(2)(a) pertains to the disallowance of excessive or unreasonable expenditures, not trade discounts. The Court emphasized that trade discounts do not constitute expenditures as they are not amounts actually spent by the assessee, leading to the conclusion that Section 40A(2) did not apply to the trade discount issue. This detailed analysis of the judgment outlines the key issues involved, the arguments presented by the parties, and the reasoning behind the decisions made by the authorities and the High Court.
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