Law:

Section:

Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Assessment year 2004-05 - Whether provisions of section 40A(2) do not apply to trade discount inasmuch as trade discount is not an expenditure which is incurred or with respect to which a payment is made - Held, yes - Assessee was engaged in business of export of rice - For relevant assessment year, it claimed certain amount of trade discount allowed at rate of 11 per cent to its sister concern - Assessing Officer allowed only 3 per cent trade discount against rate of 11 per cent on ground that it was excessive considering discount allowed to other parties - On appeal, Commissioner (Appeals) increased amount of trade discount from 3 per cent to 8 per cent, but on second appeal, Tribunal reduced same to 5 per cent - Whether very fact, that out of total domestic sales of Rs. 13.20 crores, sale made by assessee to its sister concern was Rs. 11.11 crores, clearly justified giving a trade discount of 11 per cent to its sister concern as compared to 3 per cent to others, particularly when a trade discount at 11 per cent had been allowed in earlier assessment year and that too when sale to sister concern was Rs. 2.09 crores as compared to Rs. 8.30 crores made to others - Held, yes - Whether, therefore, Tribunal was not justified in allowing a trade discount of only 5 per cent as compared to 11 per cent as claimed by assessee - Held, yes FACTS The assessee-firm was engaged in the business of export of rice. For the relevant assessment year, it had debited certain amount to its profit and loss account on account of trading discount allowed to its sister concern. The Assessing Officer required the assessee to justify the said trade discount under section 40A(2)(b), because it was at a higher rate compared to discount allowed to other parties. In reply, the assessee submitted that in the year under consideration, the sales made to its sister concern increased to Rs. 11.11 crores as against Rs. 2.09 crores in the immediately preceding year and, thus, trade discount allowed to its sister concern at a higher rate of 11 per cent was in proportion to the increased sales…

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