UNITED EXPORTS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this appeal under Section 260 -A of the Income Tax Act, 1961 the assessee challenges the orders of the Income Tax Appellate Tribunal dated 24.10.2008 whereby the Tribunal has reduced the Commission to be allowed for sale of the goods by the assessee to its sister concern from 8% as allowed by the CIT(A) to 5% and as against 11% claimed by the assessee and 3% allowed by the Assessing Officer.

(2.) THE facts of the case are that the appellant is a partnership firm engaged in the business of export of rice. A return of income for the year 2004 -2005 was filed on 01 -11 -2004 declaring a total income of Rs. 87,47,807/ -. In the profit and loss account filed along with the return the assessee firm had debited an amount of Rs. 1,26,45,614/ - on account of trading discount allowed during the year under consideration and which amount was mainly on account of the trade discount of Rs. 1,25,05,062/ - allowed to its sister concern M/s. United Overseas. The Assessing Officer required the assessee to justify the trade discount given to the sister concern because of Section 40 -A(2)(b) of the Act as it was a higher rate compared to the discount given to the other parties. In reply the assessee submitted that in the year under consideration, the sale made to M/s. United Overseas increased to Rs. 11.11 crores as against Rs. 2.59 crores in the immediately preceding year and thus trade discount which was given at a higher rate of 11% was in proportion to the increased sales made to the sister concern and which in turn resulted in increase in the turnover of the assessee firm. It was further submitted that the assessee firm was receiving payment in advance from M/s. United Overseas against the sales made and as a result of such advance payment there was always a credit balance in the account of M/s. United Overseas. It was further contended that if notional interest is taken on this credit balance the same would work out to Rs. 68,80,738/ -. It was, therefore, contended that the discount allowed to M/s. United Overseas at 11% was thus in the interest of the business of the assessee and the same was commensurate with the business advantages accrued to it.

(3.) IN appeal the CIT increased the amount to 8% from 3% taking note of the fact that the discount was in conformity with the discount given in the earlier assessment year 2003 -2004 and allowed under Section 143(3). The assessee had also contended before the CIT that it is normal market practice to give bulk discount besides normal discount. It was also submitted that the gross profit rate of the assessee firm had gone up from 18.5% as shown in the last year to 19.6% during the year under consideration. The CIT accordingly held as under: The above submissions of the appellant have been considered. It is seen that the AO did not give due credit or consideration to the arguments and submissions of the appellant which were statedly based on the requirement of business expediency. On the other hand it cannot be said that the AO was entirely incorrect in making the impugned addition. While analyzing the issue at hand it was seen that the g.p. rate of the appellant has gone up from 18.5% in the last year to 19.6% during the year under consideration. It is not a disputed fact that the sister concern has lifted goods aggregating to Rs. 11.11 crores from the appellant firm and, therefore, as per prevailing business norms it was imperative on the part of the appellant firm to offer a better discount to the sister concern. However, this offer of higher discount was not because the other party was a sister concern but because of the high quantum of purchases made by the sister concern from the appellant. In such circumstances a higher discount to the sister concern cannot be treated as unjustified. Besides the fact that the sister concern offered credit facilities to the appellant also cannot be lost sight of. Keeping in view the facts and circumstances in their entirety in view, it is held that instead of disallowing the entire incremental 8% of the trading discount given to the sister concern, the AO should have disallowed 3% for the reasons discussed above. In other words, the discount to sister concern is to be allowed to the extent of 8% which is 5% more than the trade discount given by the appellant to other parties. Hence, the addition made by the AO is upheld to the extent of 3% and deleted to the extent of 5%.