Ita/103/2009 Of The Commissioner Of Income Tax,Cochin v. Eastern Condiments (P)Ltd., Adimali

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 28TH OCTOBER 2009 / 6TH KARTHIKA 1931 ITA.No. 103 of 2009() --------------------- ITA.787/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- EASTERN CONDIMENTS (P) LTD., EASTERN VALLEY, ADIMALI. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 28/10/2009, ALONG WITH ITA NO. 132 OF 2009 ITA NO. 196 OF 2009 AND ITA NO. 272 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: -------------------------------------------------- I.T.A. Nos. 103,132,196 & 272 OF 2009 -------------------------------------------- Dated this the 28th day of October, 2009 JUDGMENT Ramachandran Nair, J. Even though several questions are raised by the revenue in the connected appeals filed against the very same assessee for theassessment years 2001-02 to 2004-05, we notice that there is only one question that could be treated as a substantial question of law, which isreframed by us as follows: Whether on the facts and in the circumstances of the case,was the Tribunal justified in cancelling the disallowance ofexcess over 5% discount given by the assessee to it'sManaging Director towards sales commission? We have heard standing counsel appearing for the appellants and Sri. P. Balakrishnan, counsel appearing for the respondent-assessee. 2. The assessee-company is part of a group engaged inmanufacture and export of spices, spices powder, curry powder, etc.,under the common brand name "Eastern". Export is done by theproprietorship concern of the Managing Director which is located at Okkal in Ernakulam Dist. whereas the assessee's manufacturing andpacking unit is at Adimaly in Idukki Dist. Normal commission paid bythe assessee for marketing it's products is 5%. However, for the saleseffected to the proprietorship concern of the Managing Director theassessee paid higher discount of 10% which is double the normal rate.The Assessing Officer noticed that the purpose is to evade payment oftax in respect of 5% because the Managing Director's concern beingengaged in export is entitled to deduction under Section 80HHC of theI.T. Act. Even though the assessee put forward a claim that sales toManaging Director was in bulk and the packing was done by theManaging Director, the assessing officer noticed that during assessmentyear 2001-02 export sales were made by the Managing Director fromthe very beginning of the previous year 2000-01 and he purchasedcertain machinery for packing only in December, 2000. Further it wasestablished by him in the assessment order that goods immediately onreceipt from the assessee were exported by the Managing Director.The assessing officer based on these findings disallowed 5% discountwhich was confirmed in first appeal. However, on second appeal, the Tribunal allowed the appeal for the assessment year 2001-02 and forthe remaining years also, following the said order, the Tribunal allowedthe claim, against which these appeals are filed by the revenue. Tribunal allowed the appeal for the assessment year 2001-02 and forthe remaining years also, following the said order, the Tribunal allowedthe claim, against which these appeals are filed by the revenue. 3. On going through the Tribunal's order and after hearing bothsides, we are unable to sustain the order of the Tribunal because theTribunal assumed the claim of the assessee that the additional discountis attributable to the packing cost incurred by the Managing Director astrue. In order to prove that the Managing Director was left withpacking for export and sale of the commodity locally, it was for theassessee to prove that sales were in bulk quantity and the ManagingDirector was engaged in packing. In this case, the finding by theassessing officer is that the Managing Director purchased certainmachinery only in December, 2000 whereas goods purchased from therespondent were from April, 2000 onwards. It is the further finding ofthe assessing officer that the goods while in transit from assessee to theManaging Director straightaway went to the export stream which isimpossible unless the goods were in packed conditions. It is seen fromthe order of the Tribunal that Tribunal has not cared to consider any of these findings, nor was there any finding by the Tribunal that theManaging Director maintained even a facility for packing. We noticethat the Tribunal assumed certain facts which were contrary to the factsfound by the assessing officer and confirmed in first appeal. Wetherefore allow the appeals by vacating the orders of the Tribunal.However, we feel that disallowance cannot be restored as such becausethe Managing Director was stated to be engaged in packing at least forsubsequent years and if additional discount of 5% is attributable topacking cost incurred, certainly disallowance should not be made atleast to the extent made by the assessing officer. It is for the assesseein co-ordination with the Managing Director to prove that sales were ofbulk quantity and the export was made after sufficient time lag withinwhich time, the Managing Director packed the commodity for exportand for local sale. In fact, the accounts of the Managing Directorwould contain the employees' strength, purchase of packing materials,receipt of goods, etc., and the documents pertaining to despatch ofgoods for export and local sale which will clearly show whetherManaging Director was engaged in packing. We therefore allow the appeal by setting aside the order of the Income Tax Appellate Tribunaland remand the assessments to the assessing officer for giving anopportunity to the assessee as well as to the Managing Director toprove that packing was done by the Managing Director to justifyadditional discount granted and if the assessee fails to do so,disallowance can be made in the assessment. 4. As already stated, other issues pertaining to disallowance ofsmall items of expenditure like vehicle expenditure, advertisementcharges, do not give rise to any substantial question of law. Wetherefore decline to entertain the appeals on these issues. Appeals are allowed in part as above. (C.N.RAMACHANDRAN NAIR)Judge. (V.K. MOHANAN) Judge. kk