TMI Blog1994 (2) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence in the asst. yr. 1982-83. The firm is engaged in manufacture and sale of ladies undergarments as also trading in hosiery goods. The assessee-firm has appointed M/s PBSC as its selling agency for the entire country. M/s PBSC is again a firm constituted of Ramesh Chander Wadhwa and Smt. Tripta Wadhwa, wife of Shri Jagdish Chander Wadhwa (with equal shares). Shri Ramesh Chander Wadhwa and Shri Jagdish Chander Wadhwa are also partners in the assessee-firm. There is another firm in the name and style of Wadhwa Son Sales Corporation (WSC for short), which is constituted of Shri Jagdish Chander Wadhwa and Smt. Kiran Wadhwa, wife of Shri Ramesh Chander Wadhwa who are also partners of the assessee-firm. This firm of WSC has a retail shop at Karol Bagh through which the assessee sells its second products, i.e., the products which have some manufacturing defects. The assessee also utilises M/s WSC for the sale of its rejected material in lot for retail sale. All the three firms, as is clear, are interconnected and interrelated coming within the ambit of s. 40A(2). The assessee had been utilising the services of M/s PBSC for the sale of its products throughoutIndiaat a discount of 15% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and M/s PBSC expressed its unwillingness to continue with the existing agreement. It was, according to Shri Manian, by way of business necessity that the assessee entered into a revised agreement with M/s PBSC since the assessee did not have outlets of its own to effect such sales, as are done through PBSC. He submitted that PBSC was operating for the assessee on allIndiabasis and the assessee had no option but to go in for revised terms. He submitted that subsequent increase in sales justified the higher discount @ 6% as against the original rate of 3%. Shri Manian submitted that the subsequent agreement dt.3rd Jan., 1984is not onesided, that is entirely in favour of M/s PBSC. He submitted that as a matter of fact the supplementary agreement was more stringent. He invited our attention to cl. (4) of the supplementary agreement which is to the effect that M/s PBSC "shall be entitled to an annual discount @ 6% of the total purchases made by them provided the annual purchases of the second party from the first party exceeds Rs. 35 lakhs, otherwise the annual discount will be 4%. Further provided that no annual discount shall be paid in case the total purchases in a financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of the learned authorised representative that the assessee's business through M/s PBSC was declining affecting its profitability, as also of M/s PBSC who were unwilling to continue to work any more with the assessee on the existing terms and conditions and assessee having no such specialised sales set up of its own, as also looking to its own business needs, entered into a supplementary agreement increasing the rate of discount on a sliding scale and the efforts made by PBSC brought their own results when assessee's sales increased as also its profitability. Shri Manian also pointed out that the authorities below have not even commented upon the terms and conditions as entered into between the assessee and M/s PBSC in the supplementary agreement. Thus, therefore, according to Shri Manian there was no basis whatsoever for making the impugned addition on facts and circumstances of the case. 4. The learned Departmental Representative, on the other hand, supported the reasoning of the learned Assessing Officer and stressed that the sales to PBSC stood diverted by the assessee at the cost of its open market sales. Under the circumstances, according to the learned Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l". 6. It is trite law that so far as the question of commercial expediency and business needs of an organisation are concerned, it is not the view of the Revenue Officer which would count, but it would be the viewpoint of an ordinary businessman dealing with a situation like the one faced by the assessee in question. The reasonableness of the expenditure for the purposes of business has to be adjudged from the point of view of a businessman and not of the Revenue. In the case of First ITO vs. Balsara Hygiene Products (1985) 12 ITD 335 (Bom), the Tribunal considered the disallowance under s. 40A(2) of payments to relatives and close associates disallowed by the Assessing Officer, when the assessee-firm appointed a company which was its close associate as selling agents and held that on facts and circumstances of the case, the disallowance of commission paid to selling agency (about Rs. 52 lakh) was not justified. The Tribunal held that, "selling agency is a matter of contract either of the contracting parties would be entering into this contract only if it is commercially profitable for them. Whether an agency is profitable to the selling agents has to be only decided by the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made by the assessee during the relevant previous year from the said firm, i.e., M/s Ess Kay enterprises but while framing reassessment on 16th March, 1990 no addition was made by the Assessing Officer, who was satisfied about the genuineness of purchases. The learned authorised representative submitted that purchase is properly vouched for when he referred to pages 26-30 of his paperbook, which indicates necessary bills raised by M/s Ess Kay Enterprises as also annexure to the bill giving details of different items purchased. It was submitted that the assessee had issued declaration in favour of M/s Ess Kay Enterprises in form ST-I under the Delhi ST Rules, 1975. He also referred to the balance sheet of M/s Ess Kay Enterprises in support of the stocks being available with the same as on31st March, 1982, as also copies of its trading and P L account. Shri Manian also referred to the finding given by the same Assessing Officer in the order of reassessment for asst. yr. 1985-86, framed under s. 143(3) after reopening the completed assessment to the effect that, "As regards purchases made from M/s Ess Kay Enterprises it is claimed that there was dispute between the parties and stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock. It was submitted that the practice followed has been accepted by the Revenue and the assessee had not changed the practice. The Assessing Officer was not satisfied with the explanation rendered and noted that the rate of G.P. at 13% disclosed by the assessee was not acceptable when the assessee had not furnished details of goods with each fabricator with quantify and fabrication charges on 31st March, 1983 and since information for the stock of goods was not available with regard to the outside parties doing job work for the assessee, the results declared could not be accepted. He further noted low withdrawals effected by partners at Rs. 43,803. He also took into account the purchases of Rs. 23,284 made by the assessee-firm M/s Ess Kay Enterprises the same having been treated as bogus. He, therefore, rejected the declared results shown by the assessee and as against the proposed rate of 15% as G.P. to be applied by the Assessing Officer, he applied the same at 14.5%, the same rate which was shown by the assessee for asst. yr. 1987-88. This led to the addition of Rs. 92,342. Since the Assessing Officer had already included the purchases of Rs. 23,284 towards the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable as compared to assessee's own history. On a consideration of relevant facts and circumstances we are of the view that addition made is not justified and as such the same is deleted. It is also noticed by us that no such condition had been made by the Assessing Officer during the course of reassessment proceedings for asst. yr. 1985-86 when the margin disclosed by the assessee at 13.31% stands accepted. This ground of appeal is accordingly allowed. 14. The next grievance of the assessee is against charging of interest under s. 217. This is only consequential and, therefore, the Assessing Officer is directed to recompute interest chargeable, if any, while giving effect to this order. This disposes of assessee's appeal for asst. yr. 1986-87. 15. The first ground of appeal for asst. yrs. 1985-86 and 1988-89 is against disallowances of Rs. 1,10,334 and Rs. 2,31,238 as annual discount @ 3% given to M/s PBSE. We have already deleted the additions as in paragraph 6 above. Therefore, these grounds of appeal are allowed. 16. The second ground of appeal in respect of asst. yrs. 1985-86 and 1988-89 is against disallowance of trade discount given to M/s Wadhwa Sons Sales Corpn. (WS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rejects to M/s WSC in unpacked conditions which required WSC to incur further expenses. He reiterated that on facts and in law the disallowance is not justified. He submitted that the discount is given in the sales bill and, therefore, does not enter the books of the assessee as an expenditure. He submitted that under s. 40A(2) only when the expenditure is incurred, which is found to be excessive or unreasonable in respect of which payments have been made to the sister concern and such expenditure is found by the Assessing Officer excessive or unreasonable, so much of such expenditure as is considered by the Assessing Officer to be excessive or unreasonable is not allowed. In this connection, the learned authorised representative referred to the judgment of the Madras High Court in the case of CIT vs. A.K. Subaraya Chetty Sons (1980) 16 CTR (Mad) 252 : (1980) 123 ITR 592 (Mad), as also the case of CIT vs. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal). 18. The learned Departmental Representative, on the other hand, supported the finding of the authorities below and submitted that the trade discount is nothing but an expenditure, which is described as trade discount but nevert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment. It was, therefore, submitted that reopening of assessment was not justified. We have heard the learned authorised representative for the assessee. We have deleted the additions made during the course of reassessment, we do not consider it necessary to go into this ground or appeal. 23. In asst. yr. 1988-89 an addition of Rs. 14,652 has been made under s. 40A(3). The Assessing Officer noted that the assessee had paid amounts aggregating to Rs. 14,652 to various karigars by way of fabrication charges in violation of the provisions of s. 40A(3) It was explained by the assessee that the payments were vouched and parties identified when their affidavits were filed, as also the circumstances leading to such payments being made in violation of the provisions of s. 40A(3). The Assessing Officer found no justification and made the impugned addition. This was sustained in appeal. The learned authorised representative submitted that full and proper explanation as rendered by the assessee before the Assessing Officer supported with affidavits of various parties and the request made to the Assessing Officer on 3rd June, 1989 requesting him to appoint commission for examination of Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
