Law:

Section:

Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Assessment year 1985-86 - Whether a subsidiary company is a 'related person' within meaning of clause (b) of section 40A(2) - Held, no - Assessee-company, engaged in business of extraction and export of iron ore, purchased iron ore from its subsidiary company at rate higher than market rate in view of assurance of supply of huge quantity of ore of uniform quality - Assessing Officer made disallowance by invoking provisions of section 40A(2) - Whether since assessee as well as its subsidiary were in same tax bracket and paid same rate of tax, there was no question of diversion of funds by paying higher rate to subsidiary company and, therefore, no disallowance could be made under section 40A(2) - Held, yes - Whether even otherwise, subsidiary company was not a related person of assessee within meaning of section 40A(2)(b) and, therefore, section 40A(2) was not attracted in instant case - Held, yes FACTS The assessee-company was engaged in the business of extraction and export of iron ore. During the relevant assessment year, it purchased iron ore from its subsidiary company. The Assessing Officer held that the prevailing rates of sale/purchase of the same grade of iron ore in the State were lower than the rate at which the assessee had purchased the ore from its subsidiary and, therefore, the provisions of section 40A(2) were attracted. The Assessing Officer, accordingly, made certain disallowance. On appeal, the Commissioner (Appeals) held that the rates at which the iron ore was purchased by the assessee from its subsidiary were determined under a contract, under which the assessee was assured a huge quantity and quality of ore and, therefore, the assessee was justified in paying the higher rate than the rate at which the ore was available during the relevant time on non-contractual basis. The Commissioner (Appeals) further held that the assessee was a company and the seller of the goods was also a company and, therefore, the rate of tax applicable to both of them was identical, namely the highest rate of tax. Therefore, by buying ore at rate higher than…

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