2014 (5) TMI 195 - HC - Income Tax

Deletion of disallowance of trade discount - associate concern of assessee Held that - The Tribunal was rightly of the view that the AO had not specifically mentioned the provisions of Section 40A(2)(b) of the Act - Relying upon CIT v. A. Raman & Company 1967 (7) TMI 2 - SUPREME Court - the trader was not obliged to make the maximum profit that he can make out of the trading transactions and avoidance of tax liability by so arranging the commercial affairs if the charge of tax is distributed and is not prohibited - A taxpayer may resort to a device to divert the income before it accrues or arises By arranging the trading transactions, the assessee Company had arranged to give 2.5% discount to the sister concern - Such facility was also made available to others similarly situated subject to the same rate of tax and there appears no attempt of evading the tax - no substantial question of law arises for consideration Decided against Revenue.

Summary

Issues:
1. Disallowance of trade discount given to an associate concern.

Analysis:
The High Court of Gujarat addressed the substantial question of law raised in the Tax Appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal. The dispute revolved around the disallowance of Rs. 18,90,950/- made by the Assessing Officer on account of a trade discount given by the assessee to its sister concern. The Assessing Officer found the turnover discount given to the sister concern to be unreasonable, especially since it was allowed to corporate customers with sales over Rs. 7 Crores. However, the CIT [A] ruled in favor of the assessee, highlighting that the resolution passed by the Board of Directors clearly stated that customers with turnover exceeding Rs. 7 Crores were eligible for the discount. The CIT [A] concluded that the disallowance was unjustified as it was not an expenditure of the respondent Company and did not cause any loss to the revenue.

The Revenue challenged this decision before the Tribunal, which noted that the Assessing Officer did not cite the provisions of Section 40a[2](b) of the Act. Despite this, the Tribunal upheld the CIT [A]'s decision, drawing on the Supreme Court's ruling in the case of CIT v. A. Raman & Company. The Tribunal emphasized that a trader is not obligated to maximize profits and can structure transactions to minimize tax liability as long as it is lawful. In this case, both the CIT [A] and the Tribunal found that the discount given to the sister concern was part of legitimate trading transactions, extended to other similarly situated entities, and did not involve tax evasion. The Revenue did not challenge the company's resolution or the sister concern's tax payments, leading the Court to conclude that there was no loss to the Revenue or any clandestine intent, thereby dismissing the Tax Appeal.

In summary, the High Court upheld the decisions of both the CIT [A] and the Tribunal, emphasizing that the trade discount given to the sister concern was a legitimate arrangement within the scope of trading transactions. The Court found no grounds for interference as there was no tax evasion or revenue loss involved. The dismissal of the Tax Appeal was based on the lack of any legal question warranting further consideration, given the factual and legal findings of the lower authorities.