JEEVAN THREAD MFG PVT LTD Vs. INCOME TAX OFFICER
LAWS(IT)-1989-1-14
INCOME TAX APPELLATE TRIBUNAL
Decided on January 04,1989

Appellant
VERSUS
Respondents

JUDGEMENT

S.S. Mehra , Judicial Member - (1.)APPELLANT-assessee, by the present appeal, challenges order dated January 7, 1986 of the learned Commissioner of Income-tax (Appeals), New Delhi, for the assessment year 1981-82 on various grounds. First two grounds are in the following manner :
" 1. That the learned Commissioner of Income-tax (Appeals)-XI, New Delhi, has erred in confirming the addition of Rs. 30,460 being one per cent, of the rebate out of the rebate allowed on sales to Messrs. Navin Bharat Co. (India) Pvt. Ltd. at the rate of two per cent, considering it to be adequate without any justification.

(2.)That the learned Commissioner of Income-tax (Appeals)-XI, New Delhi, has erred in observing that Messrs. Navin Bharat Co. (India) Pvt. Ltd. was allowed only five per cent, discount by the firm in earlier years, ignoring the facts and the material on record that Messrs. Navin Bharat Co. (India) Pvt. Ltd. has been paid bill discount at five per cent, and in addition to bill discount, a rebate on sales has been allowed either at two per cent, or even more than two per cent."
2. By status, the assessee in this case is a private limited company engaged in the business of dyeing sewing machine thread in different colours. Accounting period was the year ending March 31, 1981. The return was filed on October 31, 1983, reflecting income of Rs. 72,057.

Almost the entire sale was seen to have been made through Messrs. Navin Bharat Co. (India) Pvt. Ltd. The said private limited company is a sister concern of the assessee. There were three directors in that company and five in the assessee-company. Two directors were said to be common in both the companies and, in fact, both the companies were stated to be owned and operated by two families of the same group. The sales were shown at Rs. 33,03,445, out of which Rs. 30,40,925 were made through Messrs. Navin Bharat Co. (India) Pvt. Ltd. That company is situated in Delhi. The assessee paid five per cent, trade discount and two per cent, rebate on its sales to the said company. It was noted by the learned Income-tax Officer that to others, the assessee paid only two per cent. It was also noted that last year, the assessee did not pay any rebate or discount to anybody. The learned Income-tax Officer also noted that Messrs. Navin Bharat Co. (India) Pvt. Ltd., in the books of the assessee, had always a debit balance and, at the end of the year, the debit balance stood at Rs. 2,64,070. It was felt by the learned Income-tax Officer that the said company had been doing business with the assessee's money with no obligation to pay interest. It was also noted that the said company was also getting seven per cent, commission, whereas no such commission was paid to anybody else. An amount of Rs. 60,920 was stated to be rebate paid, to the said company and credited to their account on the closing of the accounting year. That amount never formed part of the trading transaction, nor was there any evidence on record to suggest that such a payment was agreed to be made during the course of the running of the business. The total payment made to Messrs. Navin Bharat Co. (India) Pvt. Ltd. worked out to Rs. 1,52,550 representing five per cent, of Rs. 30,40,925, and another amount of Rs. 60,920 representing rebate, the total being of Rs. 2,13,480.

(3.)THE assessee was required to give reasonableness of such heavy payment to the company. It was also required to show whether any service was rendered by the said company to the assessee. Assessee, vide letter dated August 8, 1983, stated that no favour was done to Messrs. Navin Bharat Co. (India) Pvt. Ltd. when the commission or rebate was paid. Assessee filed another letter dated September 10, 1983, stating that the said company had not earned even the quantum of invoice discount and that it had to bear expenses like packing, freight charges, etc. Another letter was also filed stating that the payment was made due to business expediency. THE learned Income-tax officer, taking note of the situation and keeping in view the provisions of Section 40A(2) of the Act, made a disallowance of Rs. 75,000, with the following observations ;
"THEre appears discrimination between the sales made to Messrs. Navin Bharat Co. (India) Pvt Ltd. and Ors. inasmuch as to the former not only the rebate of two per cent, has been given but as the assessee stated that Messrs. Navin Bharat Co. (India) Pvt. Ltd. had been demanding more amount than what was given to it by way of rebate and commission because, according to it, it had incurred expenditure on freight, etc., and that the assessee had been charging 0.25 per cent, as charity. From the copies of the bills given during the course of assessment proceedings it appears that the assessee had been spending an amount on packing the gooo's but had not been charging from its customers. THE element of expenditure incurred by Messrs. Navin Bharat Co. (India) Pvt. Ltd. on freight, packing, etc., is also marginal. THE amount charged as charity by the assessee at 0.25 per cent, is also very small. THE expenditure stated to have been incurred by Messrs. Navin Bharat Co. (India) Pvt. Ltd., which was alleged to be the basis for demanding more amount works out to one per cent. Against this the assessee had been paying seven per cent. THEre is no justification for such a heavy payment and the extent of services rendered being incommensurate with such payments. Besides, M/s. Navin Bharat Co. (India) Pvt. Ltd. had been holding the assessee's money without any obligation to pay interest. I, therefore, disallow Rs. 75,000 out of the total payment of Rs. 2,13,480 under Section 40A(2). THE observation of the Delhi High Court in Siddho Mal and Sons v. /TO [1980] 122 ITR 839, 852 are relevant in this respect. THE courts and authorities are not to wear blinkers to overlook or condone the passing of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead their duty is to lift the veil of apparent legality and get at the truth or the substance of the transaction and to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions."



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