Civil Appeal No 210 of 1983
Appeal by Special leave from the Judgment and order dated the 11th June 1981 of the Kerala High Court in TRC No 117 of 1980
PA Francis and VJ Francis for the Appellant
section Balakrishnan for the Respondent
The Judgment of the Court was delivered by VENKATRAMIAH J
In this appeal by special leave arising under the Kerala General Sales Tax Act 1963 hereinafter referred to as the Act  two questions arise for consideration
They are i whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in law in holding that the assessee was entitled to exemption under Rule 9 a of the Kerala General Sales Tax Rules 1963 hereinafter referred to as the Rules  from payment of sales tax on the turnover relating to service discount  and ii whether the value of goods returned by the purchasers could be deducted under Rule 9 b i of the Rules from the total turnover of the year of assessment in which the goods were actually returned when they had been sold in the previous assessment year
The assessee Ms Motor Industries Co Ernakulam is a dealer in diesel fuel injection parts etc
For the assessment year 1973 74 ending March 31 1974 the assessment had been completed under the Act on the best judgment basis determining the taxable turnover at Rs 474268771 by disallowing the claim for exemption of an amount of Rs 6970768 which the assessee had claimed as service discount  under Rule 9 a of the Rules and a further amount of Rs98283 under Rule 9 b i of the Rules being the 387 value of goods returned
The Assistant Commissioner of Sales Tax Assessment who was the assessing authority disallowed the claim in respect of service discount  on the ground that the amount in respect of which deduction was claimed had not been allowed as a discount in accordance with the terms of sale but had been allowed as an over riding commission and incentive  to promote trade
He disallowed the claim in respect of the value of goods which had been returned OD the ground that it related to the sales completed in the previous assessment year ie 1972 73
Aggrieved by the order of assessment the assessee filed an appeal before the Deputy Commissioner Agricultural Income Tax and Sales Tax Appeal Ernakulam
In that appeal the exemption claimed in respect of service discount  was allowed But the claim in respect of sales returns  was allowed to the extent of the turnover of Rs 552 70 being the turnover of goods returned within a period of three months from the date of sale
The appeal filed against that order by xf8he Department before the Appellate Tribunal was dismissed
Against the order of the Tribunal the Department filed a revision petition before the High Court of Kerala which again was dismissed by its judgment dated June l l 1981
This appeal is preferred with the special leave of this Court against the aforesaid judgment of the High Court
Under Chapter II of the Act which contains the charging pro visions the incidence and levy of tax is on the turnover of any dealer during any assessment year computed in accordance with the Act
Explanation 2 ii given in section 2xxvii of the Act which defines the expression turnover  says that subject to such conditions and restrictions if any as may be prescribed in that behalf any cash or other discount on the price allowed in respect of any sale and any amount refunded in respect of articles returned by customers shall not be included in the turnover
Clause a and sub clause i of clause b of Rule 9 of the Rules which prescribes the method of computation of the taxable turnover of an assessee read thus 9
Determination of taxable turnover In determin ing the taxable turnover the amounts specified in the following clauses shall subject to the conditions specified therein be deducted from the total turnover of the dealer 388 a all amounts allowed as discount provided that such discount is allowed in accordance with the regular practice of the dealer or is in accordance with the terms of a contract or agreement entered into in a particular case and provided also that the accounts show that the purchaser has paid only the sum originally charged less the discount b i all amounts allowed to purchasers in respect of goods returned by them within a period of 3 months from the date of delivery of the goods to the dealer when the goods are taxable on the amount for which they had been sold provided that the accounts show the date on which the goods were returned and the date on which and the amount for which refund was made or credit was allowed to the purchaser 
We shall first deal with the claim made in respect of service discount 
Under clause a of Rule 9 of the Rules all amounts allowed as discount where such discount is allowed in accordance with the regular practice of the dealer or is in accordance with the terms of contract or agreement entered into in a particular case have to be deducted from the total turnover in determining the taxable turnover provided the accounts of the assessee show that the purchaser has paid only the sum originally charged less the discount
In the instant case the service discount in respect of which the deduction was claimed by the assessee was the additional trade discount allowed by it to its main distributors purchasers namely the TVS group of companies which constitute a prestigious group of commercial concerns over and above the normal trade discount in consideration of the extra benefit derived by the assessee by reason of the marketing of its goods through them
This additional trade discount is allowed in accordance with the trade agreement subject to periodical variation depending upon the cost structure and changes in market conditions
It is not disputed that there were such agreements between the assessee and the purchasers and the accounts of the assessee truly reflected the actual discount allowed to the purchasers
What is however urged by the Department is that the said additional discount allowed by the assessee could not strictly be termed as discount as it was in lieu of services rendered by its main distributors by way of popularisation of the sales and consumption of the products sold by the assessee
We find it difficult 389 to accept the submission made on behalf of the Department Rule A 9 a says that all amounts allowed as discount either in accordance with regular practice on in accordance with agreement would be deductible from the total turnover provided they are duly supported by the entries in the accounts of the assessee
Ordinarily any concession shown in the price of goods for any commercial reason would be a trade discount which can legitimately be claimed as a deduction under clause a of Rule 9 of the Rules
Such a concession is usually allowed by a manufacturer or a wholesale dealer in favour of another dealer with the object of improving prospects of his own business
It is common experience that when goods are marketed through reputed companies firms or other individual dealers the demand for such goods increases and correspondingly the business of the manufacturer or the wholesaler would become more and more prosperous and its capacity to withstand competition from other manufacturers or other dealers dealing in similar goods would also improve
Hence any concession in price shown in such circumstances by way of an additional incentive with a view to promote one s own trade does qualify for deduction as a trade discount
It cannot be termed as a service charge as is attempted to be termed in this case In fact in this case apart from buying the products of the assessee no other service is being rendered by the T VS group of companies to the assessee
In the circumstances the additional discount or service discount as it is called in this case is no other than the discount referred to in Rule 9a of the Rules
We are not inclined to accept the submission that the service discount in question  is in the nature of a set off on account of reciprocal promises or amounts to consideration for an agreement styled as trading in  Trade in  contracts are those where P goods are transferred by the seller for consideration partly in money and partly in exchange of some other goods to be sold by the buyer tn the seller
In such cases there may be one contract of sale only of the principal goods coupled with a subsidiary agreement that if the buyer delivers to the seller the other goods an agreed allowance will be made
There may also be cases where the buyer may become entitled to an extra allowance for some service unconnected with the sale of the goods in question being rendered to the seller
In such cases the allowance in they price of the goods sold given by the seller to the buyer either by way of consideration for the goods supplied by the buyer to the seller or for services rendered by the buyer lo the seller would not be a trade discount as such which would qualify for 390 deduction in the determination of the taxable turnover
In the instant case the service said to have been rendered by the buyers for securing the service discount  is an integral part of the transaction of sale itself which incidentally confers on the assessee the benefit of popularisation of the assessee s goods in the market
The discount so allowed is merely a percentage of the price of the goods sold which has nothing to do with any other goods supplied or other service rendered by the buyers to the assessee
The fact that the discount is not allowed at the time of sale but on a later date at the end of the month would not make it any the less a trade discount
We are therefore of the view that The High Court has rightly upheld the deduction of the service discount  claimed in this case by the assessee from the total turnover
The appeal should therefore fail in so far as this part of the case in concerned
But on the second point which arises for consideration in this case the case of the Department appears to be well founded
Rule 9 b i of the Rules provides that all amounts allowed to purchasers in respect of goods returned by them within a period of three months from the date of delivery of the goods to the dealer when the goods are taxable on the amount for which t hey have been sold are deductible from the total turnover in determining the taxable turnover provided the accounts show the relevant entries
The two important conditions which have to be satisfied for claiming the deduction under Rule 9 b i are that the goods in question must have been returned within three months from the date of delivery and that necessary entries are made in the accounts of the assessee
If these conditions are satisfied the amount allowed to the purchaser for the returned goods would be deductible from the total turnover
The final assessment under the Act is always made in respect of one year ie the financial year which commences on April I of every calendar year and ends with March 31 of the succeeding calendar year
That is clear from the scheme of section 5 of the Act and Rules 11 18 20 and other rules found in the Rules
Any deduction that can be made under Rule 9 b i of the Rules can only be made from the total turnover of the assessment year in which the goods that are returned within three months of the date of delivery were actually sold
Such deduction cannot be claimed from the total turnover of the succeeding financial year
The reason is obvious and it can be easily demonstrated by taking the illustration of a dealer who ceases to be a dealer in the subsequent financial year
In his case unless deduction 391 is allowed in the financial year in which the goods that are subsequently returned were actually sold he would have to pay tax on the amount for which the goods in question were sold in the assessment year in which they were sold and he would not be able to claim any deduction in the subsequent year as he has ceased to be a dealer in that year
There may also be difference in the tax liability if the rates of tax are varied in the subsequent assessment year
Further by such deduction the turnover relating to the subsequent financial year which is otherwise taxable under the statute would escape taxation to the extent of the deduction Such a result cannot be permitted to ensue
It is true that in the case of many sales which have taken place in the months of January February and March in any financial year the assessee would become aware of his right to claim the deduction under Rule 9 b i in his return pertaining to that assessment year during the subsequent financial year if such goods are returned within three months of the date of delivery
It is quite possible that in such cases the assessee would have filed his annual return under Rule 18 of the Rules without any opportunity to claim any deduction where the goods are returned subsequent to the filing of the return but before the expiry of three months from the date of their delivery This however need not present much difficulty as an assessee in that position can always file a revised return and claim the deduction or even if assessment is completed demand adjustment or refund by preferring the claim in time
The learned counsel for the Department states that such an adjustment or refund  can be claimed by an assessee
The above statement made on behalf of the Department is in accordance with the scheme of the any Act and the Rules
In order to make the position clear the State 1 Government may take steps to introduce a suitable amendment in the Rules or in the Act
We are however of the view that even in p the absence of such an amendment the deduction in respect of sales 7  return  has to be allowed in the assessment relating to the financial year in which the sales of the returned goods had taken place and even where assessment for that year is completed the Department has to comply with the demand for adjustment or refund by making necessary rectification in the order of assessment provided that other conditions are satisfied as that is the inevitable consequence of Rule 9 b i which allows deduction of the value of the goods returned within three months from the date of their delivery from the total turnover of that assessment year
But in any view of the matter it is not possible to hold that such deduction in respect of returned goods can be claimed in the assessment proceedings for the financial year subsequent to the financial year in which the sales have taken 392 place
We do not therefore agree with the contrary view expressed A by the High Court relying on its decision in The Jay Engineering Works Ltd vs State of Keralal
The appeal of the Department has to be allowed to the above extent
In the result the appeal is dismissed in so far as the first question is concerned
The appeal is allowed in so far the second question is concerned
The orders of assessment for the assessment year 1973 74 shall be modified accordingly
As a consequence of this decision the order of assessment for the year 1972 73 shall be rectified in accordance with this judgment
No costs


Summary:
The respondent was an assessee under the Kerala General Sales Tax Act 1963
In determining the taxable turnover for the assessment year 1973 74 it claimed exemptions in respect of a service discount  under r 9a and an amount of Rs 98283 in respect of sales returns  under r 9bi of the Kerala General Sales Tax Rules 1963
The Assistant Commissioner disallowed the claim on both the counts stating that while the service discount  had not been allowed as a discount in accordance with the terms of the sale but as an overriding commission and incentive to promote trade the sales returns  related to the sales completed in the assessment year 1972 73
In appeal the Deputy Commissioner allowed the assessee s claim in respect of service discount  in full and that in respect of sales returns  to the extent of Rs 55270
The Department s appeal before the Appellate Tribunal and the revision filed by it before the High Court were dismissed
The appellant contended that the service discount  could not strictly be termed as discount as it was in lieu of services rendered by the respondent s main distributors by way of popularisation of the sales and consumption of the products sold by the assessee and that it was either in the nature of a set off on account of reciprocal promises or it amounted to consideration for an agreement styled as trading in and That the deduction claimed in respect of sales returns  could not be allowed from the taxable turnover for the year 1973 74 as any deduction under r 9bi could only be made from the total turnover or the assessment year in which the goods were actually sold
Dismissing the appeal in so far as it concerned the service discount  and allowing the same in respect of sales returns   HELD Rule 9 a says that all amounts allowed as discount either in accordance with regular practice or in accordance with agreement would be deductible from the total turnover provided they are duly supported by the entries in the accounts of the assessee
Ordinarily any concession shown in 385 the price of goods for any commercial reason would be a trade discount which can legitimately be claimed as a deduction under r9a
Such a concession is usually allowed with the object of improving prospects of one s own business
It is common experience that when goods are marketed through reputed concerns the demand for such goods increases and correspondingly the business of the manufacturer or the wholesale dealer would become more and more prosperous
Hence any concession in price shown in such circumstances by way of an additional incentive with a view to promote one s own trade does qualify for deduction as a trade discount
It cannot be termed as a service charge
389A D In the instant case the service discount  in respect of which the deduction was claimed was the additional trade discount allowed by the assessee to its main distributors over and above the normal trade discount in consideration of the extra benefit derived by the assessee by reason of the marketing of its goods through them
It is not disputed that there were such agreements between the assessee and the purchasers and the accounts of the assessee truly reflected the actual discount allowed to the purchasers
Apart from buying the products of the assessee no other service was rendered by the dealers to the assessee
The additional discount or service discount  is no other than the discount referred to in r9 a
388 E H 389 D E b Trade in  contracts are those where goods ale transferred by the seller for consideration partly in money and partly in exchange of some other goods to be sold by the buyer to the seller
In such cases there may be one contract of sale only of the principal goods coupled with a subsidiary agreement that if the buyer delivers to the seller the other goods an agreed allowance will be made
There may also be cases where the buyer may become entitled to an extra allowance for some service unconnected with the sale of the goods in question being rendered to the seller
In such cases the allowance in the price of the goods sold given by the seller to the buyer either by way of consideration for the goods supplied by the buyer to the seller or for services rendered by the buyer to the seller would not be a trade discount as such which would qualify or deduction in the determination of the taxable turnover
389 P H 390 A In the instant case
the service said to have been rendered by the buyers for securing the service discount  is an integral part of the transaction of sale itself which incidentally confers on the assessee the benefit of popularisation of the assessee s goods in the market
The discount so allowed is merely a percentage of the price of the Goods sold which has nothing to do with any other goods supplied or other service rendered by the buyers to the assessee
The fact that the discount is not allowed at the time of sale but on a later date at the end of the month would not make it any the less a trade discount
The High Court rightly upheld the deduction of the service discount  claimed in this case390AC 2
The two important conditions which have to be satisfied for claiming the deduction under r 9bi are that the goods in question must have been returned within three months from the date of delivery and that necessary entries are made in the accounts of the assessee If these conditions are satisfied the amount allowed to the purchaser for the returned goods would be deductible from the total turnover
Any deduction that can be made under 386 this rule can only be made from the total turnover of the assessment year in which the goods that are returned within three months of the date of delivery were actually sold
Such deduction cannot be claimed from the total turnover of the succeeding financial year
If The assessment for the relevant year is completed the department has to comply with the demand for adjustment or refund by making necessary rectification in the order of assessment
390 E H 391 F G Jay Engineering Works vs State of Kerala 43 STC 492 overruled